AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 1996
REGISTRATION NO. 333-00854
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM S-1
----------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
FIRST NATIONWIDE HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 6035 13-3778552
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER IDENTIFICATION NUMBER
</TABLE>
----------------
38 EAST 63RD STREET
NEW YORK, NEW YORK 10021
(212) 572-8500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
GLENN P. DICKES, ESQ.
FIRST NATIONWIDE HOLDINGS INC.
38 EAST 63RD STREET
NEW YORK, NEW YORK 10021
(212) 572-8500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE
OF AGENT FOR SERVICE)
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<S> <C>
COPIES TO:
STACY J. KANTER, ESQ. CHRISTIE S. FLANAGAN, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM FIRST NATIONWIDE HOLDINGS INC.
919 THIRD AVENUE 200 CRESCENT COURT, SUITE 1350
NEW YORK, NEW YORK 10022 DALLAS, TEXAS 75201
(212) 735-3000 (214) 871-5131
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1993, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to rule 434,
please check the following box. [ ]
--------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501 OF REGULATION S-K
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FORM S-1
ITEM
NUMBER CAPTION LOCATION OR HEADING IN THE PROSPECTUS
- ------------ ----------------------------------------------- --------------------------------------------
FOREPART OF THE REGISTRATION STATEMENT AND
<S> <C> <C>
1. Outside Front Cover Page of Prospectus ........ Outside Front Cover
2. Inside Front and Outside Back Cover Pages of Inside Front Cover; Outside Back Cover;
Prospectus .................................... Available Information
3. Summary Information, Risk Factors and Ratio of Summary; Risk Factors; Pro Forma Financial
Earnings to Fixed Charges ..................... Data; Selected Historical Financial Data
4. Use of Proceeds ................................ Use of Proceeds
5. Determination of Offering Price ................ Not Applicable
6. Dilution ....................................... Not Applicable
7. Selling Securityholders ........................ Not Applicable
Outside Front Cover; The Exchange Offer;
8. Plan of Distribution ........................... Plan of Distribution
Outside Front Cover; Description of the
9. Description of Securities to be Registered .... Notes
10. Interests of Named Experts and Counsel ........ Legal Matters
Outside Front Cover; Summary; Risk Factors;
Strategic Acquisitions and Dispositions; Pro
Forma Financial Data; Selected Historical
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Business; Management;
Ownership of the Common Stock; Certain
Transactions; Description of the Notes;
11. Information with Respect to the Registrant .... Consolidated Financial Statements
Disclosure of Commission Position on
12. Indemnification for Securities Act
Liabilities ................................... Not Applicable
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<PAGE>
PROSPECTUS
- ----------
OFFER FOR ALL OUTSTANDING
9 1/8% SENIOR SUBORDINATED NOTES DUE 2003
IN EXCHANGE FOR
9 1/8% SENIOR SUBORDINATED EXCHANGE NOTES DUE 2003
OF
FIRST NATIONWIDE HOLDINGS INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON JUNE 17, 1996, UNLESS EXTENDED
First Nationwide Holdings Inc., a Delaware corporation (the "Issuer"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to exchange an aggregate principal amount
of up to $140,000,000 of 9 1/8% Senior Subordinated Exchange Notes Due 2003
(the "New Notes") of the Issuer, which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), for a like
principal amount of the issued and outstanding 9 1/8% Senior Subordinated
Notes Due 2003 (the "Old Notes" and, with the New Notes, the "Notes") of the
Issuer from the holders thereof. The terms of the New Notes are identical in
all material respects to the Old Notes, except for certain transfer
restrictions and registration rights relating to the Old Notes and except
that, if the Exchange Offer is not consummated by July 1, 1996, the rate per
annum at which the Old Notes bear interest will be 9 5/8% per annum from and
including July 1, 1996 until but excluding the date of consummation of the
Exchange Offer. The Old Notes were issued on January 31, 1996 pursuant to an
offering exempt from registration under the Securities Act.
The Notes will be redeemable at the option of the Issuer, in whole or in
part, during the 12-month period beginning January 1, 2001, at a redemption
price of 104.5625% of the principal (as defined herein) amount thereof and
thereafter at 100% of the principal amount thereof, plus accrued and unpaid
interest to the date of redemption. Upon a Change of Control Call Event (as
defined herein) prior to January 1, 2001, the Issuer will have the option to
redeem the Notes, in whole but not in part, at a redemption price of 100% of
the principal amount thereof, plus accrued and unpaid interest, if any, to
the date of redemption, plus the Applicable Premium (as defined herein). Upon
a Change of Control Put Event (as defined herein), each holder of the Notes
will have the right to require the Issuer to repurchase all or a portion of
such holder's Notes at 101% of the principal amount thereof plus accrued and
unpaid interest to the date of repurchase. See "Description of the Notes."
The Old Notes are, and the New Notes will be, unsecured senior
subordinated obligations of the Issuer and will be subordinate in right of
payment to all existing and future Senior Indebtedness (as defined herein) of
the Issuer, and senior to all future subordinated debt of the Issuer, if any
is issued. At December 31, 1995, the Issuer had outstanding $200 million of
Senior Indebtedness. As of the date hereof, the Issuer has no subordinated
debt outstanding and there are no current firm arrangements to issue any
significant amount of debt which is subordinated in right of payment to the
Notes. The Notes will be effectively subordinated to (i) all existing and
future liabilities, including deposits, indebtedness and trade payables, of
the Issuer's subsidiaries, including First Nationwide Bank, A Federal Savings
Bank ("First Nationwide" or the "Bank"), and (ii) all preferred stock issued
by the Bank, including the 11-1/2% Noncumulative Perpetual Preferred Stock of
the Bank (the "Bank Preferred Stock"). As of December 31, 1995, after giving
effect to the SFFed Acquisition (as defined herein), the Branch Sales (as
defined herein), the LMUSA 1996 Purchase (as defined herein) and the issuance
of the Old Notes, the outstanding interest-bearing liabilities, including
deposits, of such subsidiaries would have been approximately $17.1 billion,
the other liabilities of such subsidiaries, including trade payables and
accrued expenses, would have been approximately $488 million, and there would
have been approximately $301 million aggregate liquidation value of the Bank
Preferred Stock outstanding.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on
the Old Notes, from January 31, 1996. Accordingly, if the relevant record
date for interest payment occurs after the consummation of the Exchange Offer
registered holders of New Notes on such record date will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid, from January 31, 1996. If however, the relevant
record date for interest payment occurs prior to the consummation of the
Exchange Offer registered holders of Old Notes on such record date will
receive interest accruing from the most recent date to which interest has
been paid or, if no interest has been paid, from January 31, 1996. Old Notes
accepted for exchange will cease to accrue interest from and after the date
of consummation of the Exchange Offer, except as set forth in the immediately
preceding sentence. Holders of Old Notes whose Old Notes are accepted for
exchange will not receive any payment in respect of interest on such Old
Notes otherwise payable on any interest payment date the record date for
which occurs on or after consummation of the Exchange Offer.
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Issuer contained in the Registration Agreement dated
January 23, 1996 among the Issuer and the other signatories thereto (the "
Registration Agreement"). See "The Exchange Offer--Consequences of Exchanging
Old Notes" for a discussion of the Issuer's belief, based on interpretations
by the staff of the Securities and Exchange Commission (the "SEC") as set
forth in no action letters issued to third parties, as to the transferability
of the New Notes upon satisfaction of certain conditions. Each broker-dealer
that receives New Notes for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus in connection with any
resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
New Notes received in exchange for Old Notes where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or
other trading activities. The Issuer has agreed that, for a period of 180
days after the Expiration Date (as defined herein), it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
The Issuer will not receive any proceeds from the Exchange Offer. The
Issuer will pay all the expenses incident to the Exchange Offer. Tenders of
Old Notes pursuant to the Exchange Offer may be withdrawn at any time prior
to the Expiration Date. In the event the Issuer terminates the Exchange Offer
and does not accept for exchange any Old Notes, the Issuer will promptly
return the Old Notes to the holders thereof. See "The Exchange Offer."
There is no existing trading market for the New Notes, and there can be no
assurance regarding the future development of a market for the New Notes, or
the ability of holders of the New Notes to sell their New Notes or the price
at which such holders may be able to sell their New Notes. Smith Barney Inc.
and Keefe, Bruyette & Woods, Inc. (the "Initial Purchasers") have advised the
Issuer that they currently intend to make a market in the New Notes. The
Initial Purchasers are not obligated to do so, however, and any market-making
with respect to the New Notes may be discontinued at any time without
notices. The Issuer does not intend to apply for listing or quotation of the
New Notes on any securities exchange or stock market.
SEE "RISK FACTORS" COMMENCING ON PAGE 17 OF THIS PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISKS TO BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD
NOTES IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 15, 1996.
<PAGE>
AVAILABLE INFORMATION
The Issuer has filed with the SEC a Registration Statement on Form S-1
(the "Registration Statement") under the Securities Act with respect to the
New Notes being offered by this Prospectus. This Prospectus does not contain
all the information set forth in the Registration Statement and the exhibits
thereto, to which reference is hereby made. Any statements made in this
Prospectus concerning the provisions of certain documents are not necessarily
complete and, in each instance, reference is made to the copy of such
document filed as an exhibit to the Registration Statement.
The Registration Statement and the exhibits thereto may be inspected and
copied at the public reference facilities maintained by the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also
be available for inspection and copying at the regional offices of the SEC
located at 7 World Trade Center, New York, New York 10048 and at Citicorp
Center, 500 West Madison Street (Suite 1400), Chicago, Illinois 60661. Copies
of such material may also be obtained from the Public Reference Section of
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Issuer is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith is required to file periodic reports and other
information with the SEC. In the event the Issuer is not required to be
subject to the reporting requirements of the Exchange Act in the future the
Issuer will be required under the Indenture, between the Issuer and The Bank
of New York, as trustee (the "Trustee"), pursuant to which the Old Notes have
been, and the New Notes will be, issued (the "Indenture"), to continue to
file with the SEC, and to furnish holders of the Notes with, the information,
documents and other reports specified in Sections 13 and 15(d) of the
Exchange Act, including reports on Forms 10-K, 10-Q and 8-K, for so long as
any Notes are outstanding.
2
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the consolidated
financial statements and the notes thereto and the notes thereto contained
elsewhere in this Prospectus. All information regarding HFFC (as defined
herein) and Home Federal (as defined herein) was prepared solely in reliance
on the periodic and other reports filed by HFFC with the SEC pursuant to the
Exchange Act and has not been independently verified by the Issuer. An index
of defined terms used in this Prospectus (other than certain terms defined
under "Description of the Notes") begins on page 154.
THE ISSUER
The Issuer
The Issuer is a holding company whose only significant asset is all of the
common stock of the Bank. As such, the Issuer's principal business operations
are conducted by the Bank and its subsidiaries.
First Nationwide
First Nationwide's principal business consists of operating retail deposit
branches and originating and/or purchasing residential real estate loans and,
to a lesser extent, certain consumer loans, and is conducted primarily in
California, Florida and Texas. The Bank also actively manages its portfolio
of commercial real estate loans acquired through acquisitions and is active
in mortgage banking and loan servicing. These operating activities are
financed principally with customer deposits, secured short-term and long-term
borrowings, collections on loans, asset sales and retained earnings. As of
December 31, 1995, the Bank had approximately $14.6 billion in assets and
approximately $10.2 billion in deposits. As of December 31, 1995, after
giving effect to the SFFed Acquisition, the Branch Sales and the LMUSA 1996
Purchase, the Bank would have had approximately $18.7 billion in assets and
$8.6 billion in deposits.
The Bank is chartered as a federal stock savings bank under the Home
Owners' Loan Act ("HOLA") and regulated by the Office of Thrift Supervision
("OTS") and the Federal Deposit Insurance Corporation ("FDIC"), which,
through the Savings Association Insurance Fund ("SAIF"), insures the deposit
accounts of First Nationwide, up to applicable limits. The Bank is also a
member of the Federal Home Loan Bank System ("FHLBS").
Business Strategy
The Bank's business strategy is to augment its position as a leading
thrift in California, principally through a combination of selective
acquisitions of high quality assets and deposits, expansion of its mortgage
banking and servicing operations and continued increases in its operating
efficiency. The key elements of this business strategy include:
o Expanding First Nationwide's retail branch network in California through
acquisitions of additional branches and other operations. Management believes
that the West Coast region, and California in particular, offers attractive
opportunities to build franchise value.
o Expanding and improving the efficiency of First Nationwide's mortgage
banking operations while increasing origination of residential loans,
continuing to retain servicing on loans that it sells and evaluating
opportunities to augment its servicing portfolio through purchases.
o Protecting the credit quality of the assets of First Nationwide through,
among other things, continuing to originate single-family loans and consumer
loans in accordance with stringent underwriting standards and actively
managing its existing portfolio of commercial real estate loans.
o Increasing First Nationwide's operating efficiency by, among other
things, expanding its customer base, increasing transaction account volumes
and reducing costs through consolidation of certain administrative and
managerial functions.
3
<PAGE>
o Identifying new opportunities to serve the needs of the communities in
which First Nationwide is located.
Since October 1994, the Bank has been active in implementing this strategy
and, in connection therewith, has consummated or entered into agreements to
consummate the transactions described below. See "Strategic Acquisitions and
Dispositions."
o On February 1, 1996, First Nationwide acquired SFFed Corp. ("SFFed") and
its wholly owned subsidiary, San Francisco Federal Savings and Loan
Association ("San Francisco Federal"), which, as of December 31, 1995, had
approximately $4.0 billion in assets and approximately $2.7 billion in
deposits (the "SFFed Acquisition"). In connection with the SFFed Acquisition,
on January 31, 1996, the Issuer issued $140,000,000 aggregate principal
amount of the Old Notes (the "Offering"). The Old Notes were sold pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. The
Issuer contributed the net proceeds from the Offering to the Bank as
additional paid-in capital (the "Capital Contribution"), which augmented the
Bank's regulatory capital to maintain its "well capitalized" status after the
SFFed Acquisition.
o On December 19, 1995, the Bank entered into a merger agreement with Home
Federal Financial Corporation ("HFFC") to acquire HFFC and its wholly owned
federally chartered savings association subsidiary, Home Federal Savings and
Loan Association of San Francisco ("Home Federal"), which, as of December 31,
1995, had approximately $718 million in assets and $625 million in deposits
and operated 15 branches in Northern California (the "Home Federal
Acquisition").
o In April 1995, the Bank acquired approximately $13 million in deposits
located in Tiburon, California from East-West Federal Bank, a federal savings
bank (the "Tiburon Purchase"). In August 1995, the Bank acquired three retail
branches located in Orange County, California with deposit accounts totalling
approximately $356 million from ITT Federal Bank, fsb (the "ITT Purchase").
On December 8, 1995, the Bank consummated the purchase of four retail
branches located in Sonoma County, California with associated deposit
accounts of approximately $143.5 million from Citizens Federal Bank, a
Federal Savings Bank (the "Sonoma Purchase" and, collectively with the
Tiburon Purchase and the ITT Purchase, the "Branch Purchases").
o From September through December of 1995, First Nationwide entered into
contracts for the sale of its retail branches in Ohio, New York, New Jersey
and Michigan (collectively, the "Branch Sales") at prices which represent an
average premium of 7.82% of the deposits sold.
o On February 28, 1995, the Bank (through its wholly owned mortgage bank
operating subsidiary, First Nationwide Mortgage Corporation ("FNMC")),
acquired a 1-4 unit residential mortgage loan servicing portfolio of
approximately $11.4 billion and other assets and liabilities (the "Maryland
Acquisition").
o On October 2, 1995, FNMC purchased from Lomas Mortgage USA, Inc.
("LMUSA") a loan servicing portfolio of approximately $11.1 billion, $2.9
billion of mortgage servicing rights ("MSRs"), which are rights to service
mortgages held by others, which MSRs are owned by third parties who have
contracted with FNMC to monitor the performance, and consolidate the
reporting, of various other servicers (a "master servicing portfolio") and
other assets (the "LMUSA 1995 Purchase"). On January 31, 1996, FNMC purchased
LMUSA's remaining loan servicing portfolio which, as of December 31, 1995,
totalled $14.1 billion, a master servicing portfolio of $2.7 billion and
other assets (the "LMUSA 1996 Purchase" and, together with the LMUSA 1995
Purchase, the "LMUSA Purchases").
Management believes that these transactions have significantly increased
the Bank's presence on the West Coast, providing additional economies of
scale and diversity of operations within its target California markets. As a
result of these transactions, 70% of the Bank's total deposits will be
located in California.
Management anticipates that the SFFed Acquisition, the Branch Sales and
the Home Federal Acquisition will enable the Bank to enhance the value of its
franchise and improve its operating efficiency
4
<PAGE>
through the consolidation or elimination of duplicative back office
operations and administrative and management functions. The efficiency of a
financial institution is often measured by its efficiency ratio, which
represents the ratio of noninterest expense to net interest income and
noninterest income. First Nationwide has improved its efficiency ratio from
approximately 62.2% on an annualized basis during the fourth quarter of 1994
to approximately 56.0% on an annualized basis during the fourth quarter of
1995.
The Maryland Acquisition and the LMUSA Purchases will provide the Bank
with the opportunity to increase its noninterest income through fees
generated from its mortgage servicing operations. The Bank's excess servicing
capacity and existing servicing expertise enabled it to accommodate the loan
servicing portfolios acquired in these transactions without the need for
significant additional investment.
The Bank applies stringent underwriting standards in originating
single-family residential loans and consumer loans, as well as in evaluating
acquisition opportunities. The Bank has a specialized credit risk management
group that is charged with the development of credit policies and performing
credit risk analyses for all asset portfolios. Since October 1994, the Bank
has also used the Put Agreement (as defined herein) to mitigate credit losses
on certain acquired assets, thereby improving the overall credit quality of
its loan portfolio.
Background
The Bank was organized as "First Gibraltar Bank, FSB" ("First Gibraltar"),
in December 1988 to acquire substantially all of the assets and certain
liabilities of five insolvent Texas thrifts (the "Texas Closed Banks") in a
federally assisted transaction pursuant to an Assistance Agreement, as
amended (the "Assistance Agreement"), by and among the Bank, FSLIC Resolution
Fund (the "FSLIC/RF") (as successor to the Federal Savings and Loan Insurance
Corporation (the "FSLIC")), First Gibraltar Holdings Inc. ("First Gibraltar
Holdings") (one of the Issuer's parent companies) and MacAndrews & Forbes
Holdings Inc. ("MacAndrews Holdings"). On December 31, 1992, First Gibraltar
sold a substantial portion of its business operations in Oklahoma, consisting
of approximately $3 million of loans and 27 branches with $809 million in
deposits (the "First Gibraltar Oklahoma Sale"). On February 1, 1993, First
Gibraltar sold to Bank of America Texas, N.A. and Bank of America Corporation
(collectively, "BankAmerica") $829 million in loans and 130 branches with
approximately $6.9 billion in deposits (the "First Gibraltar Texas Sale"),
and the Bank changed its name to "First Madison Bank, FSB" ("First Madison").
Following the First Gibraltar Texas Sale, and through September 1994, First
Madison's principal business was the funding of the assets acquired from the
Texas Closed Banks (the "Covered Assets") and the performance of its
obligations under the Assistance Agreement.
On April 14, 1994, the Bank entered into the Asset Purchase Agreement (the
"Asset Purchase Agreement") with First Nationwide Bank, A Federal Savings
Bank ("Old FNB"), an indirect subsidiary of Ford Motor Company ("Ford
Motor"). On October 3, 1994, effective immediately after the close of
business on September 30, 1994, the Bank acquired substantially all of the
assets (other than certain non-performing and other excluded assets) and
certain of the liabilities (the "FNB Acquired Business") of Old FNB (the "FN
Acquisition") for $726.5 million. Effective on October 1, 1994, the Bank
changed its name from "First Madison Bank, FSB" to "First Nationwide Bank, A
Federal Savings Bank."
In connection with the FN Acquisition, the Bank entered into a
Non-Performing Asset Sale Agreement (the "Put Agreement") with Granite
Management and Disposition, Inc. ("Granite"), a subsidiary of Ford Motor,
pursuant to which the Bank has the right through November 30, 1996 to require
Granite to purchase up to $500 million of principally non-performing assets
acquired from Old FNB. In the event that, as of November 30, 1996, the Bank
has not required Granite to purchase $500 million of non-performing assets,
it may require Granite to purchase any qualifying assets of the Bank, other
than assets which previously were eligible to be put to Granite and which the
Bank did not require Granite to purchase, up to such $500 million maximum. At
December 31, 1995, the remaining available balance under the Put Agreement
was approximately $112.4 million. Of the approximately $220 million in
non-performing assets at December 31, 1995, approximately $13.5 million were
eligible to be sold to Granite under the Put Agreement. The Issuer expects
that the Bank will use the full capacity available under the Put Agreement
for such non-performing and other qualifying assets. See "Business--Other
Activities--The Put Agreement."
5
<PAGE>
The Bank financed the FN Acquisition with: (i) a capital contribution by
the Issuer funded with the net proceeds of (a) the issuance of the Issuer's
12-1/4% Senior Notes Due 2001 (the "Senior Notes") and (b) the issuance of
the Issuer's class C common stock to First Nationwide (Parent) Holdings Inc.
("Holdings"), an indirect subsidiary of MacAndrews Holdings, (ii) the net
proceeds from the issuance of the Bank Preferred Stock and (iii) existing
cash and proceeds from securities sold under agreements to repurchase. See
"Certain Transactions."
Ownership
The Issuer is 80% indirectly owned by MacAndrews Holdings, a corporation
wholly owned through Mafco Holdings Inc. ("Mafco Holdings", and together with
MacAndrews Holdings, "MacAndrews & Forbes"), by Ronald O. Perelman, and is
20% owned by Hunter's Glen/Ford, Ltd. ("Hunter's Glen"), a limited
partnership controlled by Gerald J. Ford, Chairman of the Board, Chief
Executive Officer and a director of the Bank. See "Ownership of the Common
Stock" and "Certain Transactions--Transactions with Mr. Ford." The Issuer's
principal executive offices are located at 38 East 63rd Street, New York, New
York 10021, and its telephone number is (212) 572-8500. The Issuer was
incorporated in 1994 under the laws of the State of Delaware.
6
<PAGE>
The following chart sets forth in simplified form the ownership structure
of the Issuer and the Bank.
----------------------
| Ronald O. Perelman |
----------------------
| 100%
|
----------------------
| Mafco Holdings Inc.|
|("Mafco Holdings") |
----------------------
| 100%
|
-----------------------------------
|MacAndrews & Forbes Holdings Inc.|
| ("MacAndrews Holdings") |
-----------------------------------
| 100%
|
------------------------------------------------------
| Trans Network Insurance Services Inc. |
| ("TNIS") |
|(formerly "First Gibraltar (Parent) Holdings Inc.") |
------------------------------------------------------
| 100%
|
-------------------------------
|First Gibraltar Holdings Inc.|
|("First Gibraltar Holdings") |
-------------------------------
| 100%
|
-----------------------------------------
|First Nationwide (Parent) Holdings Inc.|
| ("Holdings") |
-----------------------------------------
|
|
| 80%*
------------------- |
| Hunter's Glen/ | |
| Ford, Ltd. | |
|("Hunter's Glen")| |
------------------- |
| 20%* |
------------------------------|
|
- ---------------------- -------------------------------
| Holders of the | |FIRST NATIONWIDE HOLDINGS INC.|
|Bank Preferred Stock| | (THE "ISSUER") |
- ---------------------- --------------------------------
|100% of preferred stock | 100%
| |
| ----------------------------------------------
| |First Nationwide Bank, A Federal Savings Bank|
------| ("First Nationwide" or the "Bank") |
----------------------------------------------
- ------------
* Hunter's Glen, a limited partnership controlled by Gerald J. Ford,
Chairman of the Board, Chief Executive Officer and a director of the
Bank, owns 100% of the class B common stock of the Issuer, representing
20% of its voting common stock (representing approximately 15% of the
voting power of its common stock), and Holdings owns 100% of the class A
common stock of the Issuer, representing 80% of its voting common stock
(representing approximately 85% of the voting power of its common
stock), and 100% of the class C common stock of the Issuer. See
"Ownership of the Common Stock."
7
<PAGE>
THE EXCHANGE OFFER
SECURITIES OFFERED ..... Up to $140,000,000 principal amount of 9 1/8
% Senior Subordinated Exchange Notes Due
2003, which have been registered under the
Securities Act. The terms of the New Notes
and the Old Notes are identical in all
material respects, except for certain
transfer restrictions and registration
rights relating to the Old Notes and except
that, if the Exchange Offer is not
consummated by July 1, 1996, the rate per
annum at which the Old Notes bear interest
will be 9 5/8 % per annum from and including
July 1, 1996 until but excluding the date of
consummation of the Exchange Offer.
THE EXCHANGE OFFER ..... The New Notes are being offered in exchange
for a like principal amount of Old Notes.
The issuance of the New Notes is intended to
satisfy obligations of the Issuer contained
in the Registration Agreement. For
procedures for tendering, see "The Exchange
Offer."
TENDERS, EXPIRATION DATE;
WITHDRAWAL ............ The Exchange Offer will expire at 5:00 p.m.,
New York City time, on June 17, 1996, or such
later date and time to which it is extended.
The tender of Old Notes pursuant to the
Exchange Offer may be withdrawn at any time
prior to the Expiration Date. Any Old Note
not accepted for exchange for any reason
will be returned without expense to the
tendering holder thereof as promptly as
practicable after the expiration or
termination of the Exchange Offer.
FEDERAL INCOME TAX
CONSEQUENCES .......... The exchange pursuant to the Exchange Offer
should not result in gain or loss to the
holders or the Issuer for federal income tax
purposes. See "Certain Federal Income Tax
Consequences."
USE OF PROCEEDS ........ There will be no proceeds to the Issuer from
the exchange pursuant to the Exchange Offer.
EXCHANGE AGENT ......... The Bank of New York is serving as exchange
agent (the "Exchange Agent") in connection
with the Exchange Offer.
CONSEQUENCES OF EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions
in the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old
Notes may not be offered or sold, unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Issuer does not
currently anticipate that it will register Old Notes under the Securities
Act. See "Description of the Notes--Registration Rights." Based on
interpretations by the staff of the SEC, as set forth in no-action letters
issued to third parties, the Issuer believes that New Notes issued pursuant
to the
8
<PAGE>
Exchange Offer in exchange for Old Notes may be offered for resale, resold or
otherwise transferred by holders thereof (other than any holder which is an
"affiliate" of the Issuer within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired
in the ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distribution of such New
Notes. However, the Issuer does not intend to request the SEC to consider,
and the SEC has not considered, the Exchange Offer in the context of a
no-action letter and there can be no assurance that the staff of the SEC
would make a similar determination with respect to the Exchange Offer as in
such other circumstances. Each holder, other than a broker-dealer, must
acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of New Notes and has no arrangement or understanding to
participate in a distribution of New Notes. Each broker-dealer that receives
New Notes for its own account in exchange for Old Notes must acknowledge that
such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities and that it will deliver
a prospectus in connection with any resale of such New Notes. See "Plan of
Distribution." In addition, to comply with the state securities laws, the New
Notes may not be offered or sold in any state unless they have been
registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with. The offer
and sale of the New Notes to "qualified institutional buyers" (as such term
is defined under Rule 144A of the Securities Act) is generally exempt from
registration or qualification under the state securities laws. The Issuer
currently does not intend to register or qualify the sale of the New Notes in
any state where an exemption from registration or qualification is required
and not available. See "The Exchange Offer--Consequences of Exchanging Old
Notes" and "Description of the Notes--Registration Rights."
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions and registration rights
relating to the Old Notes and except that, if the Exchange Offer is not
consummated by July 1, 1996, the rate per annum at which the Old Notes bear
interest will be 9 5/8% per annum from and including July 1, 1996 until but
excluding the date of consummation of the Exchange Offer. The New Notes will
bear interest from the most recent date to which interest has been paid on
the Old Notes or, if no interest has been paid on the Old Notes, from January
31, 1996. Accordingly, if the relevant record date for interest payment
occurs after the consummation of the Exchange Offer registered holders of New
Notes on such record date will receive interest accruing from the most recent
date to which interest has been paid or, if no interest has been paid, from
January 31, 1996. If, however, the relevant record date for interest payment
occurs prior to the consummation of the Exchange Offer registered holders of
Old Notes on such record date will receive interest accruing from the most
recent date to which interest has been paid or, if no interest has been paid,
from January 31, 1996. Old Notes accepted for exchange will cease to accrue
interest from and after the date of consummation of the Exchange Offer,
except as set forth in the immediately preceding sentence. Holders of Old
Notes whose Old Notes are accepted for exchange will not receive any payment
in respect of interest on such Old Notes otherwise payable on any interest
payment date the record date for which occurs on or after consummation of the
Exchange Offer.
SECURITIES OFFERED ..... Up to $140,000,000 aggregate principal
amount of 9 1/8% Senior Subordinated
Exchange Notes Due 2003, which have been
registered under the Securities Act.
MATURITY DATE .......... January 15, 2003.
INTEREST PAYMENT DATES . January 15 and July 15 of each year,
commencing July 15, 1996.
OPTIONAL REDEMPTION .... Except as described below, the Notes may not
be redeemed prior to January 1, 2001. On and
after such date, the Notes will
9
<PAGE>
be redeemable at the option of the Issuer,
in whole or in part, during the 12-month
period beginning January 1, 2001, at a
redemption price of 104.5625% of the
principal amount thereof, plus accrued and
unpaid interest to the date of redemption,
and thereafter at a redemption price of 100%
of the principal amount thereof, plus
accrued and unpaid interest to the date of
redemption.
CHANGE OF CONTROL ...... Upon a Change of Control Call Event, prior
to January 1, 2001, the Issuer will have the
option to redeem the Notes, in whole but not
in part, at an aggregate redemption price
equal to the sum of: (i) the then
outstanding principal amount of the Notes,
plus, (ii) accrued and unpaid interest to
the date of redemption, plus, (iii) the
Applicable Premium. Upon a Change of Control
Put Event, each holder of the Notes will
have the right to require the Issuer to
repurchase all or a portion of such holder's
Notes at a price equal to 101% of the
principal amount thereof plus accrued and
unpaid interest to the date of repurchase.
The Issuer's ability to purchase the Notes
may be limited by the amount of available
cash, covenants contained in the indenture
governing the Senior Notes (the "Senior
Notes Indenture") and other factors. See
"Risk Factors--Holding Company Structure;
Restrictions on Ability of Subsidiaries to
Pay Dividends," "Risk Factors--Indebtedness
and Ability to Pay Principal of the Notes"
and "Description of the Notes--Change of
Control Put Event."
RANKING AND HOLDING
COMPANY STRUCTURE ...... The Old Notes are, and the New Notes will
be, unsecured senior subordinated
obligations of the Issuer and will rank
subordinate in right of payment to all
existing and future Senior Indebtedness of
the Issuer, including the Senior Notes. The
Notes will rank pari passu in right of
payment with all future senior subordinated
debt of the Issuer, if any is issued, and
senior to all future subordinated debt of
the Issuer, if any is issued. As of December
31, 1995, the Issuer had outstanding $200
million of Senior Indebtedness, consisting
of the Senior Notes. As of the date hereof,
the Issuer has no subordinated debt
outstanding and there are no current firm
arrangements to issue any significant amount
of debt which is subordinated in right of
payment to the Notes.
The Issuer is a holding company and
therefore the Old Notes are, and the New
Notes will be, effectively subordinated to
(i) all existing and future liabilities,
including deposits, indebtedness and trade
payables, of the Issuer's subsidiaries,
including the Bank, and (ii) all preferred
stock issued by the Bank, including the Bank
Preferred Stock. As of December 31, 1995,
after giving effect to the SFFed
Acquisition, the Branch Sales, the LMUSA
1996 Purchase and the Offering, the
outstanding interest-bearing liabilities,
including deposits, of such subsidiaries
would have been approximately $17.1 billion,
the other
10
<PAGE>
liabilities of such subsidiaries, including
trade payables and accrued expenses, would
have been approximately $488 million, and
there would have been approximately $301
million aggregate liquidation value of the
Bank Preferred Stock outstanding. See "Risk
Factors--Holding Company Structure;
Restrictions on Ability of Subsidiaries to
Pay Dividends," "Risk Factors--
Subordination to Senior Indebtedness and to
Subsidiary Liabilities and Preferred Stock"
and "Description of the Notes."
CERTAIN COVENANTS ...... The Indenture contains certain covenants
that, among other things, will limit: (i)
the issuance of additional debt by the
Issuer and certain subsidiaries, (ii) the
payment of dividends on the capital stock of
the Issuer and its subsidiaries, and the
redemption or repurchase of the capital
stock of the Issuer and its subsidiaries,
including a requirement that no such
payments, redemptions or repurchases may be
made if at the time the Consolidated Common
Shareholders' Equity (as defined herein) of
the Bank is less than the Minimum Common
Equity Amount (as defined herein), (iii) the
making of certain investments, (iv)
transactions with affiliates, (v) the
creation of liens on the assets of the
Issuer, (vi) the incurrence of additional
subordinated debt that is senior in right of
payment to the Notes, (vii) the termination
or amendment of the Tax Sharing Agreement
(as defined herein), (viii) the ability of
the Issuer or any subsidiary to restrict
dividends or distributions from
subsidiaries, (ix) consolidations, mergers
and transfers of all or substantially all of
the Issuer's assets and (x) other business
activities of the Issuer. All these
limitations and prohibitions, however, are
subject to a number of important
qualifications. See "Description of the
Notes--Certain Covenants."
USE OF PROCEEDS ........ The Issuer will not receive any proceeds
from the Exchange Offer. The net proceeds of
the Offering were approximately $133
million. The Issuer contributed the net
proceeds of the Offering to the Bank as the
Capital Contribution, which augmented the
Bank's regulatory capital to maintain its
"well capitalized" status after the SFFed
Acquisition. See "Use of Proceeds."
EXCHANGE OFFER;
REGISTRATION RIGHTS .... Holders of New Notes are not entitled to any
registration rights with respect to the New
Notes. Pursuant to the Registration
Agreement, the Issuer agreed to file, at its
cost, a registration statement with respect
to the Exchange Offer. The Registration
Statement of which this Prospectus is a part
constitutes the registration statement for
the Exchange Offer. See "Description of the
Notes--Registration Rights."
RISK FACTORS
Prospectus holders of New Notes should consider carefully all of the
information set forth in this Prospectus and, in particular, should evaluate
the specific factors set forth under "Risk Factors" before making a decision
to tender their Old Notes in the Exchange Offer.
11
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
The following summary pro forma financial data gives effect to the SFFed
Acquisition and the LMUSA Purchases (collectively, the "Acquisitions"), the
Branch Sales and the Offering. The Branch Purchases consummated in 1995 and
the proposed Home Federal Acquisition have not been reflected in the pro
forma financial data because such transactions are not material either
individually or in the aggregate.
The following summary pro forma financial data as of and for the year
ended December 31, 1995, are based on (i) the historical consolidated
statement of financial condition of the Issuer giving effect to the SFFed
Acquisition, the Branch Sales, the LMUSA 1996 Purchase and the Offering as if
such transactions occurred on December 31, 1995, and (ii) the historical
consolidated statement of operations for the year ended December 31, 1995
giving effect to the Acquisitions, the Branch Sales and the Offering as if
such transactions occurred on January 1, 1995. The pro forma adjustments are
based on available information and upon certain assumptions that management
believes are reasonable under the circumstances. The Acquisitions are
accounted for under the purchase method of accounting. Under this method of
accounting, the purchase price has been allocated to the assets and
liabilities acquired based on preliminary estimates of fair value. The actual
fair value is determined as of the consummation of each of the Acquisitions.
The summary pro forma financial data do not necessarily reflect the results
of operations or the financial position of the Issuer that actually would
have resulted had the Acquisitions, the Branch Sales and the Offering
occurred at the dates indicated, or project the results of operations or
financial position of the Issuer for any future date or period.
The summary pro forma financial data should be read in conjunction with
the notes accompanying the "Pro Forma Financial Data" and the Unaudited Pro
Forma Financial Data included elsewhere in this Prospectus. In addition, the
summary pro forma financial data should be read in conjunction with the
Consolidated Financial Statements of the Issuer and the notes thereto, the
Consolidated Financial Statements of the FNB Acquired Business and the notes
thereto, and the Consolidated Financial Statements of SFFed and the notes
thereto, contained elsewhere in this Prospectus. See "Selected Historical
Financial Data" and "Pro Forma Financial Data."
12
<PAGE>
THE ISSUER
PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
LMUSA 1996
ISSUER SFFED PRO PURCHASE PRO BRANCH PRO FORMA
HISTORICAL FORMA(A) FORMA(B) SALES(C) OFFERING(D) COMBINED
------------- ------------ ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents .................. $ 312,571 $ (76,881) $ -- $ (22,649) $133,000 $ 346,041
Securities ................................. 350,016 -- -- -- -- 350,016
Mortgage-backed securities ................. 3,002,002 942,313 -- -- -- 3,944,315
Loans receivable, net ...................... 10,034,430 2,695,966 176 (5,785) -- 12,724,787
Covered assets, net ........................ 39,349 -- -- -- -- 39,349
Office premises and equipment, net ........ 93,509 13,055 -- (30,906) -- 75,658
Mortgage servicing rights, net ............. 241,355 16,000 105,859 -- -- 363,214
Core deposit and other intangible assets .. 18,606 116,742 -- (1,029) -- 134,319
Other assets ............................... 554,407 112,323 62,367 -- 7,000 736,097
------------- ------------ ------------ -------------- -------- -------------
Total assets ............................... $14,646,245 $3,819,518 $ 168,402 $ (60,369) $140,000 $18,713,796
============= ============ ============ ============== ======== =============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits ................................... $10,241,628 $2,704,193 $ 341,360 $(4,695,622) $ -- $ 8,591,559
Borrowings ................................. 3,362,372 1,054,028 (291,610) 4,268,978 140,000 8,533,768
Other liabilities .......................... 279,099 61,297 118,652 29,302 -- 488,350
------------- ------------ ------------ -------------- -------- -------------
Total liabilities .......................... 13,883,099 3,819,518 168,402 (397,342) 140,000 17,613,677
------------- ------------ ------------ -------------- -------- -------------
Minority interest .......................... 300,730 -- -- -- -- 300,730
Stockholders' equity ....................... 462,416 -- -- 336,973 -- 799,389
------------- ------------ ------------ -------------- -------- -------------
Total liabilities and stockholders' equity $14,646,245 $3,819,518 $ 168,402 $ (60,369) $140,000 $18,713,796
============= ============ ============ ============== ======== =============
</TABLE>
- ------------
(a) Represents the pro forma effect of the SFFed Acquisition.
(b) Represents the pro forma effect of the LMUSA 1996 Purchase.
(c) Represents adjustments to record the impact of the Branch Sales.
(d) Represents adjustments to record the issuance of the Notes.
<TABLE>
<CAPTION>
DOLLAR
AMOUNT PERCENT
------------ ---------
<S> <C> <C>
Pro Forma Regulatory Capital Ratios of the
Bank:
Tangible capital ............................. $1,186,474 6.30%
Core capital ................................. 1,186,474 6.30%
Risk-based capital:
Core capital ............................... 1,186,474 10.16%
Total capital .............................. 1,419,810 12.15%
</TABLE>
The amount of adjusted total assets used for the tangible and core capital
ratios was approximately $18.8 million. Risk-weighted assets used for the
risk-based core and total capital ratios amounted to approximately $11.7
million.
Under proposed congressional legislation relative to the recapitalization
of the SAIF, a special assessment could be levied against SAIF-insured
deposits, which is currently estimated to range from 85 to 90 basis points.
The impact of such assessment (at 90 basis points) on the pro forma condensed
combined statement of financial condition as of December 31, 1995 would be to
(i) increase other liabilities by approximately $69 million and (ii) reduce
stockholders' equity by approximately $69 million. See
"Regulation--Regulation of Federal Savings Banks--FDIC Assessments."
The Bank intends to maintain its "well capitalized" status (generally,
core capital of at least 5% and total risk-based capital of at least 10%) and
to distribute amounts in excess of such levels as dividends to the Issuer,
subject to regulatory limitations and the terms of the Indenture and the
Senior Notes Indenture (as defined herein). While maintaining the Bank's
regulatory capital at the "well capitalized" level and considering the
aforementioned impact of the SAIF assessment, the amount of the Bank's
capital that would be available for distribution as common dividends to the
Issuer in the first quarter of 1996 would approximate $177 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Resources."
13
<PAGE>
THE ISSUER
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUANDS)
<TABLE>
<CAPTION>
SFFED LMUSA
ACQUISITION PURCHASES BRANCH SALES PRO PRO
ISSUER PRO FORMA PRO FORMA PRO FORMA FORMA FORMA
HISTORICAL TOTALS(A) TOTALS(B) TOTALS(C) ADJUSTMENTS(D) COMBINED
------------ ------------- ---------- ------------ -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
LOANS RECEIVABLE ................................ $ 823,864 $ 230,713 $ 22,477 $ (623) $ -- $ 1,076,431
SECURITIES ...................................... 28,396 10,685 -- -- -- 39,081
MORTGAGE-BACKED SECURITIES ...................... 212,880 62,403 -- -- -- 275,283
OTHER INTEREST INCOME ........................... 10,705 -- -- -- -- 10,705
----------- ----------- ----------- ----------- ----------- -----------
TOTAL INTEREST INCOME .......................... 1,075,845 303,801 22,477 (623) -- 1,401,500
INTEREST EXPENSE:
DEPOSITS ........................................ 447,359 143,797 -- (211,530) -- 379,626
BORROWINGS ...................................... 287,456 74,587 2,018 280,671 12,775 657,507
----------- ----------- ----------- ----------- ----------- ----------
TOTAL INTEREST EXPENSE ......................... 734,815 218,384 2,018 69,141 12,775 1,037,133
----------- ----------- ----------- ----------- ----------- ----------
NET INTEREST INCOME ............................. 341,030 85,417 20,459 (69,764) (12,775) 364,367
PROVISION FOR LOAN LOSSES ....................... 37,000 11,094 -- -- -- 48,094
----------- ----------- ----------- ----------- ----------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 304,030 74,323 20,459 (69,764) (12,775) 316,273
NONINTEREST INCOME:
CUSTOMER BANKING FEES ........................... 47,493 5,291 -- (22,228) -- 30,556
MORTGAGE BANKING OPERATIONS ..................... 70,265 860 76,445 -- -- 147,570
NET GAIN (LOSS) ON SALES OF ASSETS .............. 147 -- (1,851) -- -- (1,704)
OTHER ........................................... 33,068 1,677 2,690 (789) -- 36,646
----------- ----------- ----------- ----------- ----------- ----------
TOTAL NONINTEREST INCOME ....................... 150,973 7,828 77,284 (23,017) -- 213,068
NONINTEREST EXPENSE:
COMPENSATION AND BENEFITS ....................... 154,288 11,141 19,500 (19,476) -- 165,453
OTHER ........................................... 178,265 34,896 38,081 (25,823) 1,000 226,419
----------- ----------- ----------- ----------- ----------- ----------
TOTAL NONINTEREST EXPENSE ...................... 332,553 46,037 57,581 (45,299) 1,000 391,872
----------- ----------- ----------- ----------- ----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY
ITEM AND MINORITY INTEREST ..................... 122,450 36,114 40,162 (47,482) (13,775) 137,469
FEDERAL AND STATE INCOME TAXES .................. (57,185) 3,554 3,952 (4,671) (1,355) (55,705)
----------- ----------- ----------- ----------- ----------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND MINORITY
INTEREST ....................................... 179,635 32,560 36,210 (42,811) (12,420) 193,174
EXTRAORDINARY ITEM--GAIN ON EARLY EXTINGUISHMENT OF
FHLB ADVANCES, NET ............................. 1,967 -- -- -- -- 1,967
----------- ----------- ----------- ----------- ----------- ----------
NET INCOME (LOSS) BEFORE MINORITY INTEREST ...... 181,602 32,560 36,210 (42,811) (12,420) 195,141
----------- ----------- ----------- ----------- ----------- ----------
MINORITY INTEREST--FIRST NATIONWIDE BANK PREFERRED
STOCK DIVIDENDS ................................ 34,584 -- -- -- -- 34,584
----------- ----------- ----------- ----------- ----------- ----------
NET INCOME (LOSS) ............................... $ 147,018 $ 32,560 $ 36,210 $ (42,811) $ (12,420) $ 160,557
----------- ----------- ----------- ----------- ----------- ----------
PRO FORMA SUPPLEMENTAL INFORMATION:
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY
ITEM AND MINORITY INTEREST ..................... $ 122,450 $ 36,114 $ 40,162 $ (47,482) $ (13,775) $ 137,469
INTEREST AND OTHER EXPENSE ON SENIOR NOTES (E) .. 25,539 -- -- -- -- 25,539
INTEREST AND OTHER EXPENSE ON NOTES (E) ......... -- -- -- -- 13,775 13,775
----------- ----------- ----------- ----------- ----------- ----------
TOTAL (F) ...................................... $ 147,989 $ 36,114 $ 40,162 $ (47,482) $ -- $ 176,783
=========== =========== =========== =========== =========== ==========
</TABLE>
- ------------
(a) Represents pro forma results of operations related to the SFFed
Acquisition.
(b) Represents pro forma results of operations related to the LMUSA
Purchases.
(c) Represents pro forma results of operations related to the Branch Sales.
(d) Represents adjustment to reflect (i) interest expense and amortization
of debt issuance costs associated with the Notes and (ii) the impact on
income taxes from (i).
(e) Represents interest expense and amortization of debt issuance costs.
(f) Represents income (loss) before income taxes, extraordinary items,
minority interest and interest and other expenses on Senior Notes and
Notes.
14
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The Issuer is a holding company whose only significant asset is all of the
common stock of First Nationwide. As such, the Issuer's principal business
operations are conducted by First Nationwide and its subsidiaries. The
summary historical financial data presented under the captions "Selected
Operating Data" and "Selected Financial Data" for, and as of, the years
ended, December 31, 1995 and 1994, have been derived from the Consolidated
Financial Statements of the Issuer.
The following data should be read in conjunction with the Consolidated
Financial Statements of the Issuer and the notes thereto included elsewhere
in this Prospectus. See "Selected Historical Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1995 1994(1)
------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SELECTED OPERATING DATA
Interest income ....................................................... $1,075,845 $293,139
Interest expense ...................................................... 734,815 199,845
Net interest income ................................................... 341,030 93,294
Provision for loan losses ............................................. 37,000 6,226
Noninterest income .................................................... 150,973 41,158
Noninterest expense ................................................... 332,553 96,298
Income before taxes, extraordinary item and minority interest ........ 122,450 31,928
Income tax (benefit) expense (2) ...................................... (57,185) 2,558
Income before extraordinary item and minority interest ................ 179,635 29,370
Extraordinary item: gain on early extinguishment of
FHLB advances, net ................................................... 1,967 1,376
Net income before minority interest ................................... 181,602 30,746
Minority interest--First Nationwide Bank preferred stock dividends ... 34,584 --
Net income ............................................................ 147,018 30,746
SELECTED PERFORMANCE RATIOS
Return on average assets (3) .......................................... 1.00% .69%
Return on average common equity (4) ................................... 39.33 16.05
Yield on interest-earning assets (5) .................................. 7.71 6.85
Cost of interest-bearing liabilities (6) .............................. 5.35 4.83
Net interest margin (7) ............................................... 2.44 2.18
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND MINORITY
INTEREST--FIRST NATIONWIDE BANK PREFERRED STOCK DIVIDENDS (8)
Excluding interest on deposits ........................................ 1.27x 1.32x
Including interest on deposits ........................................ 1.11x 1.16x
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994(1)
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL DATA
Securities available for sale (9) ............................... $ 1,826,075 $ 45,000
Securities held to maturity (9) ................................. 1,455 411,859
Mortgage-backed securities held to maturity (9) ................. 1,524,488 3,153,812
Loans receivable, net ........................................... 8,831,018 9,966,886
Covered assets, net ............................................. 39,349 311,603
Total assets .................................................... 14,646,245 14,683,559
Deposits ........................................................ 10,241,628 9,196,656
Securities sold under agreements to repurchase .................. 969,510 1,883,490
Borrowings ...................................................... 2,392,862 2,808,979
Total liabilities ............................................... 13,883,099 14,029,957
Minority interest--preferred stock of First Nationwide Bank .... 300,730 300,730
Stockholders' equity ............................................ 462,416 352,872
REGULATORY CAPITAL RATIOS OF THE BANK
Tangible capital ................................................ 5.84% 5.50%
Core capital .................................................... 5.84 5.50
Risk-based capital:
Core capital ................................................... 9.14 8.86
Total capital .................................................. 11.34 11.01
SELECTED OTHER DATA
Number of full service customer facilities ...................... 160 156
Loans serviced for others (10) .................................. $28,170,543 $ 7,475,119
Approximate number of employees ................................. 3,619 3,573
Non-performing assets as a percentage of the Bank's total assets 1.50% 1.49%
</TABLE>
- ------------
(1) On October 3, 1994, effective immediately following the close of
business on September 30, 1994, the Bank acquired assets with fair
values totalling approximately $14.1 billion and liabilities
(including deposit liabilities) with fair values totalling
approximately $13.4 billion from Old FNB.
(2) Income tax expense recorded in 1994 after the FN Acquisition
represents federal alternative minimum tax ("AMT") reduced, to the
extent of 90%, by net operating loss carryovers, and state tax of an
assumed rate of 8%. Income tax benefit in 1995 includes the
recognition of a deferred tax benefit of $69 million, offset by
federal AMT tax reduced, to the extent of 90%, by net operating loss
carryovers and state tax at an assumed rate of 8%.
(3) Return on average assets represents net income as a percentage of
average assets.
(4) Return on average common equity represents net income available to
common stockholders as a percentage of average common equity.
(5) Yield on interest-earning assets represents interest income as a
percentage of average interest-earning assets.
(6) Cost of interest-bearing liabilities represents interest expense as a
percentage of average interest-bearing liabilities.
(7) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(8) Earnings used in computing the ratio of earnings to combined fixed
charges and minority interest--First Nationwide Bank preferred stock
dividends consist of income before taxes, extraordinary item and
minority interest. Fixed charges consist of interest expense on
borrowings, the interest component of lease expense and, where
indicated, interest expense on deposits.
(9) Fluctuation in securities and mortgage-backed securities held to
maturity and securities available for sale from December 31, 1994 to
December 31, 1995 resulted from the reclassification of substantially
all securities and mortgage-backed securities (except for
mortgage-backed securities resulting from the securitization with
recourse of certain of the Bank's loans) from held-to-maturity to
securities available for sale.
(10) Includes loans serviced by FNMC, the Bank and FGB Realty (as defined
herein), excluding loans serviced for the Bank by FNMC.
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RISK FACTORS
Prospective holders of New Notes should consider carefully all of the
information set forth in this Prospectus and, in particular, should evaluate
the following risks before tendering their Old Notes in the Exchange Offer,
although the risk factors set forth below (other than "--Consequences of
Failure to Exchange and Requirements for Transfer of New Notes") are
generally applicable to the Old Notes as well as the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE AND REQUIREMENTS FOR TRANSFER OF NEW
NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions
in the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old
Notes may not be offered or sold, unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Issuer does not
currently anticipate that it will register Old Notes under the Securities
Act. Based on interpretations by the staff of the SEC, as set forth in
no-action letters issued to third parties, the Issuer believes that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold or otherwise transferred by holders thereof (other
than any such holder which is an "affiliate" of the Issuer within the meaning
of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holders' business and such holders have no arrangement with any person to
participate in the distribution of such New Notes. However, the Issuer does
not intend to request the SEC to consider, and the SEC has not considered,
the Exchange Offer in the context of a no-action letter and there can be no
assurance that the staff of the SEC would make a similar determination with
respect to the Exchange Offer as in such other circumstances. Each holder,
other than a broker-dealer, must acknowledge that it is not engaged in, and
does not intend to engage in, a distribution of New Notes and has no
arrangement or understanding to participate in a distribution of New Notes.
If any holder is an affiliate of the Issuer, is engaged in or intends to
engage in or has any arrangement or understanding with respect to the
distribution of the New Notes to be acquired pursuant to the Exchange Offer,
such holder (i) could not rely on the applicable interpretations of the staff
of the SEC and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Issuer has agreed that, for a
period of 180 days after the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale.
See "Plan of Distribution." However, to comply with the state securities
laws, the New Notes may not be offered or sold in any state unless they have
been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with. The offer
and sale of the New Notes to "qualified institutional buyers" (as such term
is defined under Rule 144A of the Securities Act) is generally exempt from
registration or qualification under the state securities laws. The Issuer
currently does not intend to register or qualify the sale of the New Notes in
any state where an exemption from registration or qualification is required
and not available. See "The Exchange Offer--Consequences of Exchanging Old
Notes."
HOLDING COMPANY STRUCTURE; RESTRICTIONS ON ABILITY OF SUBSIDIARIES TO PAY
DIVIDENDS
The Issuer is a holding company with no significant business operations of
its own. The Issuer's only significant asset is all of the common stock of
the Bank. The Issuer's only source of cash to pay interest
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on and principal of the Notes is expected to be distributions from the Bank.
As of December 31, 1995, on an unconsolidated basis the Issuer had
outstanding $200 million of indebtedness, consisting of the Senior Notes, and
after giving effect to the SFFed Acquisition, the Branch Sales, the LMUSA
1996 Purchase and the Offering, on an unconsolidated basis the Issuer's total
indebtedness would have been $340 million. See "Consolidated Capitalization."
The annual interest payable on the Senior Notes is $24.5 million and the
annual interest payable on the Notes is $12.8 million. Although the Issuer
expects that distributions from the Bank will be sufficient to pay interest
when due and the principal amount of the Notes at maturity, distributions
from the Bank may not be sufficient to pay the principal amount of the Notes
prior to maturity upon the occurrence of an Event of Default (as defined
herein) or to redeem or repurchase the Notes upon a Change of Control Put
Event. In addition, the Issuer may use such distributions to make dividends,
distributions or other Restricted Payments subject to the limitations set
forth in the Indenture. See "Description of the Notes--Certain
Covenants--Limitation on Restated Payments." In addition, there can be no
assurance that earnings from the Bank will be sufficient to make
distributions to the Issuer to enable it to pay interest on the Notes when
due or principal of the Notes at maturity or that such distributions will be
permitted by the terms of any debt instruments of the Issuer's subsidiaries
then in effect, by the terms of any class of preferred stock issued by the
Bank, including the Bank Preferred Stock, or under applicable federal thrift
laws or regulations.
The terms of the Bank Preferred Stock provide that the Bank may not
declare or pay any dividends or other distributions (other than in shares of
common stock of the Bank or other classes of equity securities of the Bank
ranking junior to the Bank Preferred Stock (collectively, "Junior Stock"))
with respect to any Junior Stock or repurchase, redeem or otherwise acquire,
or set apart funds for the repurchase, redemption or other acquisition of any
Junior Stock (including the common stock held by the Issuer) through a
sinking fund or otherwise, unless and until: (i) the Bank has paid full
dividends on the Bank Preferred Stock for the four most recent dividend
periods, or funds have been paid over to the dividend disbursing agent of the
Bank for payment of such dividends, and (ii) the Bank has declared a cash
dividend on the Bank Preferred Stock at the annual dividend rate for the
current dividend period, and sufficient funds have been paid over to the
dividend disbursing agent of the Bank for the payment of a cash dividend for
such current dividend period. The Bank is currently in compliance with both
of such requirements.
The federal thrift laws, including the regulations of the OTS, limit the
Bank's ability to pay dividends to the Issuer. The Bank generally may not
declare dividends or make any other capital distribution if, after the
payment of such dividend or other distribution, it would fall within any of
the three undercapitalized categories under the prompt corrective action
standards of the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"). Other limitations apply to the Bank's ability to pay
dividends, the magnitude of which depends upon the extent to which the Bank
meets its fully phased-in regulatory capital requirements. See
"Regulation--Regulation of Federal Savings Banks--Capital Distribution
Regulation." In addition, the HOLA requires every savings association
subsidiary of a savings and loan holding company to give the OTS at least 30
days' advance notice of any proposed dividends to be made on its guarantee,
permanent or other non-withdrawable stock or else such dividend will be
invalid. Further, the OTS may prohibit any capital distribution that it
determines would constitute an unsafe or unsound practice. See
"Regulation--Regulation of Federal Savings Banks--Capital Distribution
Regulation" and "Business--Dividend Policy."
As of December 31, 1995, the Bank met the capital requirements of a "well
capitalized" institution under the FDICIA prompt corrective action standards.
Although management of the Issuer expects the Bank to remain "well
capitalized," there can be no assurance that the Bank will continue to be
"well capitalized" under applicable OTS regulations or will remain "well
capitalized" thereafter. If the Bank were only "adequately capitalized", it
would not be able to accept Brokered Deposits (as defined herein) unless it
received a waiver from the FDIC.
INDEBTEDNESS AND ABILITY TO PAY PRINCIPAL OF THE NOTES
At December 31, 1995, on an unconsolidated basis the Issuer had
outstanding $200 million of indebtedness, consisting of the Senior Notes, and
after giving effect to the SFFed Acquisition, the Branch
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Sales, the LMUSA 1996 Purchase and the Offering, on an unconsolidated basis
the Issuer's total indebtedness would have been $340 million. See
"Consolidated Capitalization." In addition, subject to the restrictions
imposed by the Indenture and the Senior Notes Indenture, the Issuer may incur
from time to time additional indebtedness that is pari passu with, or
subordinate in right of payment to, the Notes. See "Description of the
Notes--Certain Covenants."
The Issuer currently anticipates that, in order to pay the principal
amount of the Notes upon the occurrence of an Event of Default or to redeem
or repurchase the Notes upon a Change of Control Put Event or, in the event
that earnings from the Bank are not sufficient to make distributions to the
Issuer to enable it to pay the principal amount of the Notes at maturity, the
Issuer may be required to adopt one or more alternatives, such as borrowing
funds, selling its equity securities, or the equity securities or assets of
the Bank, or seeking capital contributions or loans from its affiliates. None
of the affiliates of the Issuer are required to make any capital
contributions or other payments to the Issuer with respect to the Issuer's
obligations on the Notes. There can be no assurance that any of the foregoing
actions could be effected on satisfactory terms, that any of the foregoing
actions would enable the Issuer to pay the principal amount of the Notes or
that any of such actions would be permitted by the terms of the Indenture,
the Senior Notes Indenture or any other debt instruments of the Issuer or the
Issuer's subsidiaries then in effect, by the terms of the Bank Preferred
Stock or under applicable federal thrift laws or regulations.
The terms of the Indenture and the Senior Notes Indenture generally permit
the Issuer to make distributions (and other Restricted Payments (as defined
herein)) of up to 75% of the consolidated net income of the Issuer if, after
giving effect to such distribution or payment (i) the Bank is "well
capitalized" under applicable OTS regulations and (ii) the Consolidated
Common Shareholders' Equity of the Bank is at least equal to the Minimum
Common Equity Amount. The Issuer is able to loan funds to its affiliates
pursuant to the Indenture and the Senior Notes Indenture provided that the
Consolidated Common Shareholders' Equity of the Bank is at least the Minimum
Common Equity Amount, and the terms of any such loan are in writing and on
terms that would be obtainable in arm's length dealings, and, in certain
cases, to the additional requirement that the loan be approved by a majority
of disinterested directors. Subject to such restrictions, such loans may
consist of any and all funds available to the Issuer, whether or not such
funds may be distributed (or otherwise paid as a Restricted Payment) pursuant
to the terms of the Indenture or the Senior Notes Indenture. See "Description
of the Notes--Certain Covenants." Accordingly, there can be no assurance
that, notwithstanding the receipt by the Issuer of sufficient funds to enable
it to pay the principal amount of the Notes at maturity, the Issuer will have
funds available to pay the principal amount of the Notes at maturity or prior
to maturity upon the occurrence of an Event of Default or to redeem or
repurchase the Notes upon a Change of Control Put Event.
SUBORDINATION TO SENIOR INDEBTEDNESS AND TO SUBSIDIARY LIABILITIES AND
PREFERRED STOCK
The Notes are subordinate in right of payment to all Senior Indebtedness.
At December 31, 1995, the Issuer had outstanding $200 million of Senior
Indebtedness, consisting of the Senior Notes. The Issuer may not pay
principal of, premium or interest on the Notes, make any deposit pursuant to
defeasance provisions or repurchase, redeem or otherwise retire the Notes if
any Senior Indebtedness is not paid when due or any other default on Senior
Indebtedness occurs and the maturity of such Senior Indebtedness is
accelerated in accordance with its terms unless, in either case, and until
such default has been cured or waived or has ceased to exist, any such
acceleration has been rescinded or such Senior Indebtedness has been
discharged or paid in full. In addition, if a default exists with respect to
certain Senior Indebtedness and certain other conditions are satisfied, the
Issuer may not make any payments on the Notes for a designated period of
time. Upon any payment or distribution of assets of the Issuer upon a total
or partial liquidation, dissolution, reorganization or similar proceeding,
the holders of Senior Indebtedness will be entitled to receive payment in
full before the holders of the Notes are entitled to receive any payment. See
"Description of the Notes--Subordination."
In addition, any right of the Issuer and its creditors, including holders
of the Notes, to participate in the assets of any of the Issuer's
subsidiaries, including the Bank, upon any liquidation or reorganization of
any such subsidiary will be subject to the prior claims of that subsidiary's
creditors, including the Bank's depositors and trade creditors (except to the
extent that the Issuer may itself be a creditor of such
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subsidiary). Accordingly, the Notes will be effectively subordinated to (i)
all existing and future liabilities, including deposits, indebtedness and
trade payables, of the Issuer's subsidiaries, including the Bank, and (ii)
all preferred stock issued by the Bank, including the Bank Preferred Stock.
At December 31, 1995, after giving effect to the SFFed Acquisition, the
Branch Sales, the LMUSA 1996 Purchase and the Offering, the outstanding
interest-bearing liabilities, including deposits, of such subsidiaries would
have been approximately $17.1 billion, the other liabilities of such
subsidiaries, including trade payables and accrued expenses, would have been
approximately $488 million, and there would have been approximately $301
million aggregate liquidation value of the Bank Preferred Stock outstanding.
In the event of the liquidation or dissolution of the Bank, the holders of
the Bank Preferred Stock will have preference over the Issuer, as the holder
of all of the common stock of the Bank, with respect to the assets of the
Bank. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation-- Liquidity."
The ability of the Issuer to repurchase the Notes as a result of the
occurrence of a Change of Control Put Event will be subject to the ability of
the Issuer to make restricted payments at that time under the Senior Notes
Indenture. Accordingly, the repurchase of the Notes, if not permitted by the
Senior Notes Indenture, could create an event of default under the Senior
Notes Indenture as a result of which any repurchase would, absent a waiver,
be blocked by the subordination provisions of the Indenture. See "Description
of the Notes--Subordination." Failure of the Issuer to repurchase the Notes
when required could result in an Event of Default with respect to the Notes
whether or not such repurchase is permitted by the subordination provisions.
RESTRICTIONS IMPOSED BY TERMS OF THE ISSUER'S INDEBTEDNESS; CONSEQUENCES OF
FAILURE TO COMPLY
The terms and conditions of the Indenture and the Senior Notes Indenture
impose restrictions that affect, among other things, the ability of the
Issuer to incur debt, pay dividends or make distributions, engage in a
business other than holding the common stock of the Bank and similar banking
institutions, make acquisitions, create liens, sell assets and make certain
investments. The ability of the Issuer to comply with the foregoing
provisions can be affected by events beyond the Issuer's control. The breach
of any of these covenants could result in a default under one or more of the
debt instruments of the Issuer. In the event of a default under any
indebtedness of the Issuer or the Issuer's subsidiaries, the holders of such
indebtedness could elect to declare all amounts outstanding under their
respective debt instruments to be due and payable. Any such declaration under
a debt instrument of the Issuer or the Issuer's subsidiaries is likely to
result in an event of default under one or more of the other debt instruments
of the Issuer or the Issuer's subsidiaries. If indebtedness of the Issuer or
the Issuer's subsidiaries were to be accelerated, there could be no assurance
that the assets of the Issuer or the Issuer's subsidiaries, as the case may
be, would be sufficient to repay in full borrowings under all of such debt
instruments, including the Notes. See "--Indebtedness and Ability to Pay
Principal of the Notes," "Business--Sources of Funds" and "Description of the
Notes."
STRATEGY
Management intends to continue the implementation of its various
strategies in order to capitalize on the strengths of the Bank. See
"Business--Business Strategy." The continued implementation of any of
management's strategies is subject to numerous contingencies beyond
management's control. These contingencies include general and regional
economic conditions, competition and changes in regulation and interest
rates. Accordingly, no assurance can be given that any of these strategies
will prove to be effective or that management's goals will be achieved.
ECONOMIC CONDITIONS
The Bank's loan portfolio is concentrated in California. As a result, the
financial condition of the Bank will be subject to general economic
conditions and, in particular, to conditions in the California residential
real estate market. Due to the slow recovery of the economy, particularly in
California's market for residential real estate, the Bank may find it
difficult to originate a sufficient volume of high-quality residential
mortgage loans or maintain its asset quality, either of which could
negatively
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impact future performance. In addition, any downturn in the economy
generally, and in California in particular, could further reduce real estate
values and the volume of mortgages originated. Real estate values in
California could also be affected by earthquakes.
INTEREST RATE RISK AND CREDIT RISK
It is expected that the Bank will continue to realize income primarily
from the differential or "spread" between the interest earned on loans,
securities and other interest-earning assets, and interest paid on deposits,
borrowings and other interest-bearing liabilities. Net interest spreads are
affected by the difference between the maturities and repricing
characteristics of interest-earning assets and interest- bearing liabilities.
In addition, loan volume and yields are affected by market interest rates on
loans, and rising interest rates generally are associated with a lower volume
of loan originations. It is expected that a substantial majority of the
Bank's assets will continue to be indexed to changes in market interest rates
and a substantial majority of its liabilities will continue to be short term,
which will mitigate the negative effect of a decline in yield on its assets.
At December 31, 1995, the Bank had $10.0 billion in assets indexed to changes
in market rates and $10.9 billion in liabilities maturing or repricing within
one year. In addition, the lag in implementing repricing terms on the Bank's
adjustable rate assets may result in a decline in net interest income in a
rising interest rate environment. There can be no assurance that the Bank's
interest rate risk will be minimized or eliminated. In addition, an increase
in the general level of interest rates may adversely affect the ability of
certain borrowers to pay the interest on and principal of their obligations.
Accordingly, changes in levels of market interest rates could materially
adversely affect the Bank's net interest spread, asset quality, loan
origination volume and overall results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Asset and Liability Management."
Securities owned by the Bank are accounted for in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." On November 15, 1995, the
Financial Accounting Standards Board ("FASB") issued a special report, "A
Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities" (the "Special Report"). The
Special Report provided all entities a one-time opportunity to reassess their
ability and intent to hold securities to maturity and allowed a one-time
reclassification of securities from held-to-maturity to securities
available-for-sale without "tainting" the remaining held-to-maturity
securities. On December 29, 1995, the Issuer reclassified $1.5 billion and
$231.8 million in carrying value of mortgage-backed securities and U.S.
government and agency securities, respectively, from the held-to-maturity to
the available-for-sale portfolio, resulting in a net after-tax increase of
$22.5 million in stockholders' equity. If the market value of these
securities and mortgage- backed securities is subsequently less than the
carrying value, there will be a negative impact on consolidated stockholders'
equity for financial reporting purposes; however, there will be no impact on
the Bank's regulatory capital.
ASSET QUALITY; SATISFACTION OF OBLIGATIONS OF GRANITE, OLD FNB AND FORD MOTOR
In the several years preceding the FN Acquisition, the FNB Acquired
Business had experienced losses stemming from increases in non-performing
assets. While the Bank may also experience such losses, management believes
that the risk that the Bank will suffer future adverse effects from any
additional deterioration of the portfolio acquired from Old FNB is minimized
by the disposition by Old FNB of non-performing assets prior to the FN
Acquisition, the retention by Old FNB of certain assets, principally
non-performing or other problem assets (with a net book value of
approximately $441 million at September 30, 1994), and the right of the Bank
pursuant to the Put Agreement to sell Granite up to $500 million of certain
assets, primarily multi-family and commercial real estate loans and
residential mortgage loans with an original principal balance greater than
$250,000 (the "Putable Assets"), which are primarily non-performing, through
November 30, 1996, less $89 million, the amount of sales of certain
non-performing assets by Old FNB to Granite during the period from January 1,
1994 through the consummation of the FN Acquisition. At December 31, 1995,
the remaining available balance under the Put Agreement was approximately
$112.4 million. Of the approximately $220 million in non-performing assets at
December 31, 1995, approximately $13.5 million were eligible to be sold to
Granite under the Put Agreement. See "Business--Other Activities--The Put
Agreement."
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In the event that, as of November 30, 1996, the Bank has not required
Granite to purchase $500 million of non-performing assets, it may require
Granite to purchase any qualifying Putable Assets of the Bank, other than
assets which previously became Putable Assets and which the Bank did not
require Granite to purchase, up to such $500 million maximum.
The Put Agreement will not protect the Bank from losses: (i) on the assets
not covered by the Put Agreement or the assets covered by the Put Agreement
in excess of the coverage limits described above, (ii) on the assets owned by
the Bank prior to the FN Acquisition, (iii) on the Putable Assets which
become non-performing and which the Bank does not require Granite to purchase
prior to the expiration of its rights under the Put Agreement, (iv) on the
assets acquired following the FN Acquisition or (v) incurred after November
30, 1996. See "Business--Other Activities--The Put Agreement." There can be
no assurance that the Bank will not experience losses from non-performing
assets.
Pursuant to the Asset Purchase Agreement, Old FNB has agreed to indemnify
the Bank from certain breaches of representations, warranties and covenants.
Although the Bank believes that the obligations of Granite under the Put
Agreement and Old FNB under the Asset Purchase Agreement are enforceable
against Granite and Old FNB, respectively, and that Granite and Old FNB will
have the ability to satisfy their respective obligations under such
provisions, there can be no assurance that a court will enforce such
provisions or that Granite or Old FNB will have the ability to satisfy their
respective obligations. Ford Motor has guaranteed the obligations of Granite
under the Put Agreement and the obligations of Old FNB under the Asset
Purchase Agreement.
MORTGAGE PORTFOLIO AND MSRS
At December 31, 1995, the Bank held a 1-4 unit residential mortgage loan
portfolio of approximately $5.4 billion, and MSRs on a loan portfolio
totalling approximately $33.6 billion. The Bank's MSRs had a book value of
$241.4 million at December 31, 1995. On January 31, 1996, the Bank acquired
additional MSRs from LMUSA on a loan portfolio totalling approximately $14.1
billion. A decline in long-term interest rates generally results in an
acceleration in mortgage loan prepayments, and higher than anticipated levels
of prepayments generally cause the accelerated amortization of MSRs and
generally will result in reductions in the market value of the MSRs and in
the Bank's servicing fee income. There can be no assurance that long-term
interest rates will not decline and the rate of mortgage loan prepayments
will not exceed management's estimates, resulting in a charge to earnings in
the period of adjustment and reductions in the market value of the MSRs and
in loan servicing fee income, or that management will be able to reinvest the
cash from mortgage loan prepayments in assets earning yields comparable to
the yields on the prepaid mortgages.
COMPETITION
The Bank experiences significant competition in both attracting and
retaining deposits and in originating real estate and consumer loans.
The Bank competes with other thrift institutions, commercial banks,
insurance companies, credit unions, thrift and loan associations, money
market mutual funds and brokerage firms, in attracting and retaining
deposits. Competition for deposits from large commercial banks is
particularly strong. Many of the nation's thrift institutions and many large
commercial banks have a significant number of branch offices in the areas in
which the Bank operates.
In addition, there is strong competition in originating and purchasing
real estate and consumer loans, principally from other savings and loan
associations, commercial banks, mortgage banking companies, insurance
companies, consumer finance companies, pension funds and commercial finance
companies. The primary factors in competing for loans are the quality and
extent of service to borrowers and brokers, economic factors such as interest
rates, interest rate caps, rate adjustment provisions, loan maturities,
loan-to-value ("LTV") ratios, loan fees, and the amount of time it takes to
process a loan from receipt of the loan application to date of funding. The
Bank's future performance is dependent on its ability to originate a
sufficient volume of mortgage loans in its local market areas and through its
wholesale network and, if it is unable to originate a sufficient volume of
mortgage loans, to purchase a sufficient quantity of
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high-quality mortgage-backed securities with adequate yields. There can be no
assurance that the Bank will be able to effect such actions on satisfactory
terms.
REGULATION; SPECIAL ASSESSMENT AND OTHER LEGISLATIVE PROPOSALS REGARDING SAIF
The financial institutions industry is subject to extensive regulation,
which materially affects the business of the Issuer and the Bank. Regulations
to which the Bank, the Issuer and its parent companies are subject may be
changed at any time, and the interpretation of these regulations is also
subject to change. There can be no assurance that future changes in such
regulations or in their interpretation will not adversely affect the business
of the Issuer or the Bank.
Congress is currently considering legislation that would, among other
things, capitalize the SAIF, which is currently undercapitalized, by imposing
a special assessment on SAIF-insured institutions, such as the Bank. See
"Regulation--Regulation of Federal Savings Banks--FDIC Assessments." Based
upon preliminary FDIC estimates of the potential assessment rate, the effect
on the Bank of the assessment, as proposed by Congress, after giving effect
to the SFFed Acquisition, the Branch Sales, the Home Federal Acquisition and
the Branch Purchases, would be a pre-tax charge in the range of $75 to $80
million ($68 to $72 million on an after-tax basis). Such an assessment would
not be expected to cause the Bank to fail to meet the capital requirements of
a "well capitalized" institution based upon the Bank's regulatory capital and
asset levels as of December 31, 1995. Other legislative proposals would
combine the two deposit insurance funds of the FDIC and merge the charters
for federal savings associations and commercial banks. Such legislation, if
enacted, could have a material adverse effect on the operations of the Bank
and the Issuer. The Issuer is unable to predict whether, or in what form,
such legislation would be enacted. See "Regulation."
TAX SHARING AGREEMENT; AVAILABILITY OF NET OPERATING LOSS CARRYOVERS
The Bank, the Issuer and Mafco Holdings have entered into a tax sharing
agreement (the "Tax Sharing Agreement") effective as of January 1, 1994,
pursuant to which: (i) the Bank will pay to the Issuer amounts equal to the
taxes that the Bank would be required to pay if it were to file a return
separately from the affiliated group of which Mafco Holdings is the common
parent (the "Mafco Group"), and (ii) the Issuer will pay to Mafco Holdings
amounts equal to the taxes that the Issuer would be required to pay if it
were to file a consolidated return on behalf of itself and the Bank
separately from the Mafco Group. The Tax Sharing Agreement allows the Bank to
take into account, in determining its liability to the Issuer, any net
operating loss carryovers that it would have been entitled to utilize if it
had filed separate returns for each year since the formation of the Bank. The
Tax Sharing Agreement also allows the Issuer to take into account, in
determining its liability to Mafco Holdings, any net operating losses that it
would have been entitled to utilize if it had filed a consolidated return on
behalf of itself and the Bank for each year since the formation of the Bank.
Accordingly, pursuant to the Tax Sharing Agreement, the benefits of any net
operating losses generated by the Bank since its formation are retained by
the Bank and the Issuer.
The Bank has generated significant federal income tax net operating losses
since it was organized in December 1988. This is due, in part, to the fact
that under applicable federal income tax law, the financial assistance
received by the Bank pursuant to the Assistance Agreement was excluded from
the taxable income of the Bank. In addition to such tax-free financial
assistance, the Bank has been entitled to its normal operating deductions,
including interest expense and certain losses relating to its loan portfolio.
As a result, the Bank generated significant net operating losses for federal
income tax purposes even though its operations were profitable. Furthermore,
under the reorganization provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), the Bank succeeded to certain net operating loss
carryovers of the Texas Closed Banks.
At December 31, 1995, if the Issuer had filed a consolidated tax return on
behalf of itself (as common parent) and the Bank for each year since the
formation of the Bank, it would have had approximately $2.6 billion of
regular net operating losses and approximately $992 million of AMT net
operating losses, both of which the Issuer would have been entitled to
utilize. A portion of such losses, to the extent not previously used to
offset income, would expire in the year 2002 and in each year thereafter and
would fully
23
<PAGE>
expire in 2007. It is expected that under the Tax Sharing Agreement, the Bank
and the Issuer will be able to eliminate a significant portion of the amounts
that they otherwise would be required to pay to the Issuer and Mafco
Holdings, respectively, under the Tax Sharing Agreement in respect of federal
income tax and, accordingly, it is not expected that the Bank or the Issuer
will record significant amounts of federal income tax expense as members of
the Mafco Group. Payments made by the Issuer under the Tax Sharing Agreement
with the Mafco Group during the year ended December 31, 1995 totalled $3.1
million. There were no such payments in 1994. Such payments may increase
significantly at such time as the net operating losses described above are
either used in full to offset income or expire.
If for any reason the Bank and the Issuer were to deconsolidate from the
Mafco Group, only the amount of the net operating loss carryovers of the Bank
and the Issuer not already utilized by the Mafco Group would be available to
offset the taxable income of the Bank and the Issuer. If for any reason the
Bank were to deconsolidate from the Issuer with the Issuer remaining a member
of the Mafco Group, the net operating losses of the Bank not already utilized
by the Mafco Group would be available to offset the taxable income
subsequently recognized by the Bank, but would no longer be available to
offset the taxable income of the Issuer. At December 31, 1995, approximately
58% of such net operating loss carryovers had been so utilized by the members
of the Mafco Group. The net operating loss carryovers are subject to review
and potential disallowance, in whole or in part, by the Internal Revenue
Service (the "IRS"). Any disallowance of the Bank's net operating loss
carryovers may increase the amounts that the Bank would be required to pay to
the Issuer under the Tax Sharing Agreement and that the Issuer would be
required to pay to Mafco Holdings and would therefore decrease the earnings
of the Bank available for distribution to the Issuer.
TAX EFFECTS OF DIVIDEND PAYMENTS BY THE BANK
Dividend distributions made to the Issuer, as the sole owner of the Bank's
common stock, and to holders of the Bank Preferred Stock, in each case in
excess of the Bank's accumulated earnings and profits, as well as any
distributions in dissolution or in redemption or liquidation of stock, may
cause the Bank to recognize a portion of its tax bad debt reserves as income
and, accordingly, could cause the Bank to make payments to the Issuer under
the Tax Sharing Agreement. As a result, the Issuer may be required to make
payments to Mafco Holdings under the Tax Sharing Agreement if the Issuer has
insufficient expenses and losses to offset such income. The Bank does not
expect to generate substantial amounts of federal taxable income (after
taking into account its net operating loss carryovers) from any recapture of
its bad debt reserve. Accordingly, the recapture of its bad debt reserve as a
result of distributions to stockholders, or of the redemption of stock, would
not be expected to have a material adverse effect on the Bank.
TAXATION OF THE BANK
Under current law, the Bank qualifies as a domestic building and loan
association for federal income tax purposes. Accordingly, the Bank is
entitled to take its bad debts into account using the reserve method of
accounting under Section 593 of the Code. The Bank determines the amount of
the appropriate addition to its bad debt reserves based on the experience
method of accounting of Section 593(b)(3), which is described in Section
585(b)(2) of the Code, rather than on the percentage of taxable income method
described in Section 593(b)(2) of the Code.
Each of the Senate and House of Representatives has passed a bill which
includes a provision that, if enacted, would repeal Section 593 of the Code.
In addition, the President has proposed tax legislation that also includes a
provision repealing Section 593 of the Code which is substantially similar to
the provision passed by Congress. If tax legislation is ultimately enacted
that includes the repeal of Section 593 of the Code, the reserve method of
accounting for bad debts would no longer be available to the Bank. Rather,
the Bank generally would be required to take its bad debts into account using
the specific charge-off method. Pursuant to the specific charge-off method,
the Bank would be entitled to take its bad debts into account in the taxable
year during which such debts become wholly or partially worthless. The repeal
of Section 593 of the Code also may require a domestic building and loan
association, such as the Bank, to recapture a certain portion of its bad debt
reserve into income under certain circumstances, and,
24
<PAGE>
accordingly, could cause the Bank to make payments to the Issuer under the
Tax Sharing Agreement. As a result, the Issuer may be required to make
additional payments to Mafco Holdings under the Tax Sharing Agreement if the
Issuer has insufficient expenses and losses to offset such income. At
December 31, 1995, the Bank had tax bad debt reserves totalling $187 million,
all of which had been provided for in deferred tax liabilities. The Bank does
not expect to generate substantial amounts of federal taxable income (after
taking into account its net operating loss carryovers) from any recapture of
the Bank's bad debt reserve. Accordingly, the repeal of the reserve method of
accounting for bad debts, if enacted, would not be expected to have a
material adverse effect on the Bank.
LACK OF A PUBLIC MARKET FOR THE NOTES
The New Notes are being offered to the holders of the Old Notes. The Old
Notes were issued on January 31, 1996 to a small number of institutional
investors and are eligible for trading in the Private Offering, Resale and
Trading through Automated Linkages (PORTAL) Market, the National Association
of Securities Dealers' screenbased, automated market for trading of
securities eligible for resale under Rule 144A. To the extent that Old Notes
are tendered and accepted in the Exchange Offer, the trading market for the
remaining untendered Old Notes could be adversely affected. There is no
existing trading market for the New Notes, and there can be no assurance
regarding the future development of a market for the New Notes, or the
ability of holders of the New Notes to sell their New Notes or the price at
which such holders may be able to sell their New Notes. Although the Initial
Purchasers have informed the Issuer that they currently intend to make a
market in the New Notes, they are not obligated to do so and any such market
making may be discontinued at any time without notice. As a result, the
market price of the New Notes could be adversely affected. The Issuer does
not intend to apply for listing or quotation of the New Notes on any
securities exchange or stock market.
CONTROL BY MACANDREWS & FORBES
The Issuer is 80% indirectly owned through MacAndrews & Forbes by Ronald
O. Perelman and 20% owned by Hunter's Glen, a limited partnership controlled
by Gerald J. Ford, the Chairman of the Board, Chief Executive Officer and a
director of the Bank. Holdings owns 100% of the class A common stock of the
Issuer, representing 80% of its voting common stock (representing
approximately 85% of the voting power of its voting common stock) and 100% of
the class C common stock of the Issuer, and Hunter's Glen owns 100% of the
class B common stock, representing 20% of its voting common stock
(representing approximately 15% of the voting power of its common stock). See
"Ownership of the Common Stock" and "Certain Transactions--Transactions with
Mr. Ford." As a result, MacAndrews & Forbes will be able to direct and
control the policies of the Issuer and its subsidiaries, including mergers,
sales of assets and similar transactions. See "Certain
Transactions--Relationship with MacAndrews & Forbes."
25
<PAGE>
STRATEGIC ACQUISITIONS AND DISPOSITIONS
The Bank's total consolidated assets have grown from $924 million as of
September 30, 1994, immediately prior to the FN Acquisition, to approximately
$14.6 billion at December 31, 1995. The current composition of the Bank's
assets and operations resulted principally from certain of the acquisitions
and dispositions described below. The FN Acquisition laid the foundation for
the Bank's current strategy, the implementation of which is reflected in
subsequent acquisitions and dispositions. See "Business--Business Strategy."
ACQUISITIONS
The FN Acquisition
On April 14, 1994, the Bank entered into the Asset Purchase Agreement with
Old FNB, an indirect subsidiary of Ford Motor, pursuant to which, on October
3, 1994, effective immediately after the close of business on September 30,
1994, the Bank purchased the FNB Acquired Business for $726.5 million.
Effective on October 1, 1994, the Bank changed its name from "First Madison
Bank, FSB" to "First Nationwide Bank, A Federal Savings Bank."
The Bank financed the FN Acquisition and paid related fees and expenses
with: (i) a capital contribution by the Issuer funded with the net proceeds
of (a) the issuance of the Issuer's Senior Notes and (b) the issuance of the
Issuer's class C common stock to Holdings, (ii) the net proceeds from the
issuance of the Bank Preferred Stock, and (iii) existing cash and proceeds
from securities sold under agreements to repurchase. See "Certain
Transactions."
The Maryland Acquisition
In December 1994, FNMC entered into a series of agreements with the
Resolution Trust Corporation as conservator for Standard Federal Savings
Association, America's Mortgage Servicing, Inc., a mortgage company,
America's Lending Network, Inc., and StanFed Financial Services, Inc.
(collectively, "StanFed"), of Frederick, Maryland, to acquire certain of
StanFed's mortgage servicing assets and assume certain of StanFed's mortgage
servicing liabilities for approximately $178 million. As a result of the
Maryland Acquisition, FNMC acquired a 1-4 unit residential mortgage loan
servicing portfolio of approximately $11.4 billion (including $1.8 billion of
MSRs that are owned by third parties who have subcontracted to FNMC the
servicing function (a "sub-servicing portfolio")) and certain other assets
and liabilities. The transaction was consummated on February 28, 1995. In
connection with the Maryland Acquisition, FNMC has moved its mortgage
servicing operations to Maryland from its former location in Sacramento,
California. Costs totalling $5.7 million associated with such consolidation
are included in noninterest expense in the Issuer's consolidated statement of
operations for the year ended December 31, 1995.
In April 1995, the Bank closed substantially all of its retail loan
production offices. Costs associated with closures of approximately $2.1
million are included in noninterest expense in the Issuer's consolidated
statement of operations for the year ended December 31, 1995.
The Branch Purchases
In April 1995, First Nationwide consummated the Tiburon Purchase in which
it acquired approximately $13 million in deposits located in Tiburon,
California from East-West Federal Bank, a federal savings bank. In August
1995, the Bank consummated the ITT Purchase in which it acquired three retail
branches located in Orange County, California with deposit accounts totalling
approximately $356 million from ITT Federal Bank, fsb. On December 8, 1995
the Bank consummated the Sonoma Purchase in which it acquired four retail
branches located in Sonoma County, California with associated deposit
accounts of approximately $143.5 million from Citizens Federal Bank, a
Federal Savings Bank. The weighted average deposit premium paid in connection
with the Branch Purchases was 3.78%.
26
<PAGE>
The LMUSA Purchases
On October 2, 1995, FNMC purchased from LMUSA in the LMUSA 1995 Purchase a
loan servicing portfolio of approximately $11.1 billion (including a
sub-servicing portfolio of $3.1 billion), a master servicing portfolio of
$2.9 billion and other assets, principally existing loans and loan production
operations of LMUSA, for $100 million, payable in installments, and the
assumption of certain indebtedness relating to the acquired loan portfolio.
On January 31, 1996, FNMC purchased in the LMUSA 1996 Purchase LMUSA's
remaining $14.1 billion loan servicing portfolio (including a sub- servicing
portfolio of $2.4 billion), a master servicing portfolio of $2.7 billion, its
real estate acquired through loan foreclosures in connection with its
servicing operations and its trade names for $160.8 million (as adjusted
pursuant to the terms of the agreement) payable in installments and subject
to certain adjustments, and the assumption of certain of LMUSA's obligations
secured by its mortgage servicing operations.
The SFFed Acquisition
On February 1, 1996, the Bank consummated the SFFed Acquisition pursuant
to which the Bank acquired SFFed and its wholly owned federal savings
association subsidiary, San Francisco Federal. The aggregate consideration
paid in the SFFed Acquisition was approximately $264 million. Following
completion of the SFFed Acquisition, SFFed was liquidated and San Francisco
Federal was merged into the Bank.
San Francisco Federal operated 35 branches in the Northern California
area, and as a result of the SFFed Acquisition and the related consolidation
of branches, the number of First Nationwide's retail branches in Northern
California increased to 63. San Francisco Federal's primary business
consisted of operating retail deposit branches and originating and/or
purchasing residential real estate loans and, to a lesser extent, certain
consumer loans. At December 31, 1995, San Francisco Federal had approximately
$4.0 billion in assets and approximately $2.7 billion in deposits.
The Bank financed the SFFed Acquisition with existing cash and other
borrowings, some of which were repaid with the proceeds from the sale on
February 23, 1996 of an aggregate of approximately $298 million in carrying
value of consumer loans. The Capital Contribution augmented the Bank's
regulatory capital to maintain its "well capitalized" status after the SFFed
Acquisition.
In connection with the SFFed Acquisition, First Nationwide assumed $50
million of 11.20% Senior Notes issued by SFFed in September 1994 (the "SFFed
Notes"). See "Business--Sources of Funds-- SFFed Notes."
The Home Federal Acquisition
On December 19, 1995, the Bank entered into a merger agreement with HFFC,
pursuant to which the Bank will acquire HFFC and its wholly owned federally
chartered savings association subsidiary, Home Federal, which, at December
31, 1995, had approximately $718 million in assets and $625 million in
deposits and operated 15 branches in the Northern California area. The
aggregate consideration to be paid in connection with the Home Federal
Acquisition is estimated to be approximately $70.6 million.
The Home Federal Acquisition is subject to approval by HFFC's
shareholders. The Home Federal Acquisition is presently anticipated to close
in the second quarter of 1996, although there can be no assurance that the
Home Federal Acquisition will be consummated. The Issuer expects that First
Nationwide will remain "well capitalized" after consummation of the Home
Federal Acquisition.
DISPOSITIONS
The Illinois Sale
On October 7, 1994, the Bank sold (the "Illinois Sale") the FNB Acquired
Business' branch network located in Illinois consisting of 26 branches with
approximately $1.2 billion in deposits to Household Bank, f.s.b. The $89
million deposit premium received by the Bank was treated as a reduction of
the core deposit intangible asset established in connection with the FN
Acquisition.
27
<PAGE>
The Branch Sales
From September through December of 1995, First Nationwide entered into the
following agreements relating to the Branch Sales:
<TABLE>
<CAPTION>
NUMBER OF APPROXIMATE APPROXIMATE
GENERAL BRANCHES TO AMOUNT OF AMOUNT OF DATE OF
NAME OF PURCHASER LOCATION BE SOLD DEPOSITS (A) ASSETS (A) AGREEMENT
- ------------------- -------------- ----------- ------------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Fifth Third Bank of Ohio 28 $1,414,695 $18,480 9/22/95
Northeastern Ohio
North Fork Bank Long Island, 10 602,014 8,222 9/28/95
New York
Middletown Upstate New 8 485,975 5,594 9/29/95
Savings Bank York
Independence Brooklyn, New 3 330,073 3,308 10/11/95
Savings Bank York
Republic National Manhattan, New 3 282,580 1,795 10/31/95
Bank of New York York
Midlantic Bank New Jersey 4 509,597 5,556 11/03/95
Independence Staten Island, 2 286,723 3,718 11/15/95
Savings Bank New York
Charter One Bank Michigan 21 783,965 12,667 12/14/95
----------- ------------- ------------- -----------
Total 79 $4,695,622 $59,340
=========== ============= =============
</TABLE>
- ------------
(a) As of December 31, 1995.
The Branch Sales, when consummated, will result in gains, which, based on
deposit information at December 31, 1995, will be approximately $366 million
on a pre-tax basis. The gains from the Branch Sales will be used, as
necessary, to augment the Bank's regulatory capital to maintain its "well
capitalized" status after the SFFed Acquisition.
The sale of the Bank's retail branches in the state of Ohio (the "Ohio
Branch Sale") was consummated on January 19, 1996. The sales of the Bank's
retail branches in the states of New York and New Jersey (the "Northeast
Branch Sales") were consummated in a series of closings that occurred between
January 12, 1996 and March 22, 1996. The sale of these 58 branches has
generated pre-tax gains of approximately $308 million. Although regulatory
approval for the sale of the Bank's retail branches in the state of Michigan
(the "Michigan Branch Sale") has been obtained and it is anticipated that the
Michigan Branch Sale will be consummated during the second quarter of 1996,
no assurances can be given as to whether or when such transaction will be
consummated.
USE OF PROCEEDS
The Issuer will not receive any proceeds from the Exchange Offer. The net
proceeds of the Offering were approximately $133 million. The Issuer
contributed the net proceeds to the Bank as the Capital Contribution, which
augmented the Bank's regulatory capital to maintain its "well capitalized"
status after the SFFed Acquisition.
28
<PAGE>
CONSOLIDATED CAPITALIZATION
The following table sets forth the actual consolidated capitalization of
each of the Issuer (on a stand-alone basis) and First Nationwide at December
31, 1995 and the capitalization of the Issuer on a consolidated basis at such
date as adjusted to give effect to the SFFed Acquisition, the Branch Sales,
the LMUSA 1996 Purchase and the Offering. The following table should be read
in conjunction with the Consolidated Financial Statements of the Issuer and
the notes thereto, "Pro Forma Financial Data" and the Unaudited Pro Forma
Financial Data included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
CONSOLIDATED
CAPITALIZATION
FIRST OF ISSUER AS
ISSUER NATIONWIDE ADJUSTMENTS ADJUSTED
---------- ------------- --------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deposits .................................... $ -- $10,241,628 $(1,650,069)(a) $8,591,559
========== ============= =============== ==============
Borrowings:
Securities sold under agreements to
repurchase ............................... $ -- $ 969,510 $ 2,698,370 (a) $3,667,880
Other borrowings (primarily FHLB
advances) ................................ -- 2,100,131 2,276,360 (a) 4,376,491
---------- ------------- --------------- --------------
Total ................................... $ -- $ 3,069,641 $ 4,974,730 $8,044,371
========== ============= =============== ==============
Long-term notes:
12 1/4% Senior Notes Due 2001 (b) ........ $ 200,000 $ -- $ -- $ 200,000
10% Subordinated Debentures Due 2006 ..... -- 89,600 -- 89,600
11.20% Senior Notes Due 2004 .............. -- -- 56,666 (a) 56,666
9 1/8% Senior Subordinated Notes Due 2003 -- -- 140,000 (c) 140,000
---------- ------------- --------------- --------------
Total long-term notes ................... 200,000 89,600 196,666 486,266
---------- ------------- --------------- --------------
Minority interest--preferred stock of First
Nationwide Bank ............................ 300,730 -- -- 300,730
---------- ------------- --------------- --------------
Stockholders' equity:
As adjusted:
Class A common stock (par value $1.00 per
share; 800 shares authorized, 800 shares
issued and outstanding) .................. 1 -- -- 1
Class B common stock (par value $1.00 per
share; 200 shares authorized, 200 shares
issued and outstanding) .................. -- -- -- --
Class C common stock (par value $1.00 per
share; 250 shares authorized, 169.5
shares issued and outstanding) ........... -- -- -- --
Additional paid-in capital ................ 223,000 -- -- 223,000
Net unrealized holding gain on securities
available for sale ....................... -- 63,512 -- 63,512
Retained earnings ......................... 175,903 -- 336,973 (d) 512,876
---------- ------------- --------------- --------------
Total stockholders' equity .............. 398,904 63,512 336,973 799,389
---------- ------------- --------------- --------------
Total capitalization ........................ $ 899,634 $ 153,112 $ 533,639 $1,586,385
========== ============= =============== ==============
</TABLE>
- ------------
(a) Represents deposits and borrowed funds of SFFed assumed by the Bank at
their approximate respective fair values at December 31, 1995, the
impact of the Branch Sales and deposits transferred to the Bank as a
result of the LMUSA 1996 Purchase.
(b) Excludes $3.1 million accrued interest payable on the Senior Notes at
December 31, 1995.
(c) Represents the issuance of the Notes.
(d) Represents the net gains on the Branch Sales assuming an aggregate
deposit premium of $367 million.
29
<PAGE>
PRO FORMA FINANCIAL DATA
The following pro forma financial data gives effect to the Acquisitions,
the Branch Sales and the Offering.The Branch Purchases consummated in 1995
and the proposed Home Federal Acquisition have not been reflected in the pro
forma financial data because such transactions are not material either
individually or in the aggregate.
The following pro forma financial data as of and for the year ended
December 31, 1995, are based on (i) the historical consolidated statement of
financial condition of the Issuer giving effect to the SFFed Acquisition, the
Branch Sales, the LMUSA 1996 Purchase and the Offering as if such
transactions occurred on December 31, 1995, and (ii) the historical
consolidated statement of operations for the year ended December 31, 1995
giving effect to the Acquisitions, the Branch Sales and the Offering as if
such transactions occurred on January 1, 1995. The pro forma adjustments are
based on available information and upon certain assumptions that management
believes are reasonable under the circumstances. The Acquisitions are
accounted for under the purchase method of accounting. Under this method of
accounting, the purchase price has been allocated to the assets and
liabilities acquired based on preliminary estimates of fair value. The actual
fair value is determined as of the consummation of each of the Acquisitions.
The pro forma financial data do not necessarily reflect the results of
operations or the financial position of the Issuer that actually would have
resulted had the Acquisitions, the Branch Sales and the Offering occurred at
the dates indicated, or project the results of operations or financial
position of the Issuer for any future date or period.
The pro forma financial data should be read in conjunction with the
accompanying notes thereto and the Unaudited Pro Forma Financial Data
included elsewhere in this Prospectus. In addition, the pro forma financial
data should be read in conjunction with the Consolidated Financial Statements
of the Issuer and the notes thereto, the Consolidated Financial Statements of
the FNB Acquired Business and the notes thereto, and the Consolidated
Financial Statements of SFFed and the notes thereto, contained elsewhere in
this Prospectus. See "Selected Historical Financial Data."
30
<PAGE>
THE ISSUER
PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SFFED ACQUISITION
-------------------------------------
ISSUER SFFED ADJUST- SFFED PRO
HISTORICAL HISTORICAL MENTS(A) FORMA(B)
----------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS .... $ 312,571 $ 195,251 $(272,132)(2) $ (76,881)
SECURITIES .................... 350,016 -- -- --
MORTGAGE-BACKED SECURITIES ... 3,002,002 932,398 9,915 (1) 942,313
LOANS RECEIVABLE, NET ......... 10,034,430 2,719,381 (23,415)(1) 2,695,966
COVERED ASSETS, NET ........... 39,349 -- -- --
OFFICE PREMISES AND EQUIPMENT,
NET .......................... 93,509 21,899 (8,844)(1) 13,055
MORTGAGE SERVICING RIGHTS, NET 241,355 2,183 13,817 (1) 16,000
CORE DEPOSIT AND OTHER
INTANGIBLE ASSETS ............ 18,606 8,053 108,689 (1) 116,742
OTHER ASSETS .................. 554,407 112,323 112,323
----------- ---------- ------------- ----------
TOTAL ASSETS .................. $14,646,245 $3,991,488 $(171,970) $3,819,518
============ ========== ============= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
DEPOSITS ...................... $10,241,628 $2,693,243 $ 10,950 (1) $2,704,193
BORROWINGS .................... 3,362,372 1,041,558 12,470 (1) 1,054,028
OTHER LIABILITIES ............. 279,099 61,297 -- 61,297
----------- ---------- ------------- ----------
TOTAL LIABILITIES ............. 13,883,099 3,796,098 23,420 3,819,518
----------- ---------- ------------- ----------
MINORITY INTEREST ............. 300,730 -- -- --
STOCKHOLDERS' EQUITY .......... 462,416 195,390 (181,089)(3) --
-- -- (14,301)(1) --
----------- ---------- ------------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ......... $14,646,245 $3,991,488 $(171,970) $3,819,518
=========== ========== ============= ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
LMUSA 1996 PURCHASE
------------------------------------
LMUSA LMUSA PRO PRO FORMA
HISTORICAL ADJUSTMENTS(C) FORMA(D) BRANCH SALES(E) OFFERING(F) COMBINED
---------- ------------ ---------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS $ -- $ -- $ -- $ (22,649)(8) $133,000 (7) $ 346,041
CASH AND CASH EQUIVALENTS .... -- -- -- -- -- 350,016
SECURITIES .................... -- -- -- -- -- 3,944,315
MORTGAGE-BACKED SECURITIES ... 176 -- 176 (5,785)(8) -- 12,724,787
LOANS RECEIVABLE, NET ......... -- -- -- -- -- 39,349
COVERED ASSETS, NET ...........
OFFICE PREMISES AND EQUIPMENT, -- -- -- (30,906)(8) -- 75,658
NET .......................... 89,902 15,957 (4) 105,859 -- -- 363,214
MORTGAGE SERVICING RIGHTS, NET
CORE DEPOSIT AND OTHER -- -- -- (1,029)(8) -- 134,319
INTANGIBLE ASSETS ............ 62,367 -- 62,367 -- 7,000 (7) 736,097
OTHER ASSETS .................. ---------- ------------ ---------- --------------- ------------ -----------
$152,445 $ 15,957 $ 168,402 $ (60,369) $140,000 $18,713,796
TOTAL ASSETS .................. ========== ============ ========== =============== ============ ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY $ -- $ 341,360 (5) $ 341,360 $(4,695,622)(8) -- $ 8,591,559
DEPOSITS ...................... -- (291,610)(5) (291,610) 4,268,978 (9) $140,000 (11) 8,533,768
BORROWINGS .................... 2,874 115,778 (6) 118,652 29,302 (10) -- 488,350
OTHER LIABILITIES ............. ---------- ------------ ---------- --------------- ------------ -----------
2,874 165,528 168,402 (397,342) 140,000 17,613,677
TOTAL LIABILITIES ............. ---------- ------------ ---------- --------------- ------------ -----------
-- -- -- -- -- 300,730
MINORITY INTEREST ............. 149,571 (165,528)(7) -- 336,973 (10) -- 799,389
STOCKHOLDERS' EQUITY .......... -- 15,957 (4) -- -- -- --
---------- ------------ ---------- --------------- ------------ -----------
TOTAL LIABILITIES AND $ 152,445 $ 15,957 $ 168,402 $ (60,369) $140,000 $18,713,796
STOCKHOLDERS' EQUITY ......... ========== ============ ========== =============== ============ ===========
</TABLE>
- ------------
(a) Represents adjustments to record (i) SFFed's assets and liabilities at
preliminary estimates of their respective fair values, (ii) the
elimination of historical goodwill, (iii) the purchase price of the
SFFed Acquisition and (iv) the elimination of the equity of SFFed.
(b) Represents the pro forma effect of the SFFed Acquisition.
(c) Represents adjustments to record (i) the assets acquired and
liabilities assumed in the LMUSA 1996 Purchase at preliminary
estimates of their respective fair values, (ii) acquisition fees and
expenses, (iii) the cash paid at closing for the LMUSA 1996 Purchase,
(iv) the impact of the transfer of custodial accounts to the Bank and
(v) the elimination of the excess of assets acquired over the
liabilities assumed in the LMUSA 1996 Purchase.
(d) Represents the pro forma effect of the LMUSA 1996 Purchase.
(e) Represents adjustments to record the impact of the Branch Sales.
(f) Represents adjustments to record the issuance of the Notes.
<TABLE>
<CAPTION>
DOLLAR
AMOUNT PERCENT
------------ ---------
<S> <C> <C>
Pro Forma Regulatory Capital Ratios of the Bank:
Tangible capital .............................. $1,186,474 6.30%
Core capital .................................. 1,186,474 6.30%
Risk-based capital:
Core capital ................................ 1,186,474 10.16%
Total capital ............................... 1,419,810 12.15%
</TABLE>
The amount of adjusted total assets used for the tangible and core
capital ratios was approximately $18.8 million. Risk-weighted assets used
for the risk-based core and total capital ratios amounted to approximately
$11.7 million.
Under proposed congressional legislation relative to the
recapitalization of the SAIF, a special assessment could be levied against
SAIF-insured deposits, which is currently estimated to range from 85 to 90
basis points. The impact of such assessment (at 90 basis points) on the
pro forma condensed combined statement of financial condition as of
December 31, 1995 would be to (i) increase other liabilities by
approximately $69 million, and (ii) reduce stockholders' equity by
approximately $69 million. See "Regulation--Regulation of Federal Savings
Banks--FDIC Assessments."
The Bank intends to maintain its "well capitalized" status (generally,
core capital of at least 5% and total risk-based capital of at least 10%)
and to distribute amounts in excess of such levels as dividends to the
Issuer, subject to regulatory limitations and the terms of the Indenture
and the Senior Notes Indenture. While maintaining the Bank's regulatory
capital at the "well capitalized" level and considering the aforementioned
impact of the SAIF assessment, the amount of the Bank's capital that would
be available for distribution as common dividends to the Issuer in the
first quarter of 1996 would approximate $177 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Capital Resources."
31
<PAGE>
THE ISSUER
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(1) The SFFed Acquisition will be accounted for using the purchase method of
accounting. The total purchase cost will be allocated first to the tangible
and identifiable intangible assets and liabilities of SFFed based on their
respective fair values and the remainder will be allocated to goodwill. The
aggregate purchase price was determined as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Purchase price, as defined:
Shares outstanding at December 31, 1995 ................. 7,883,247
Options outstanding at December 31, 1995 ................ 553,304
-----------
Total ................................................... 8,436,551
Purchase price per share: ............................... $ 32.00
-----------
$ 269,969
Exercise of options outstanding (a) ..................... (7,425)
-----------
Purchase price .......................................... 262,544
Acquisition fees and expenses ........................... 15,000
Acquisition fees and expenses included in equity of
SFFed ....................................................... (5,412)
-----------
Total ................................................. $ 272,132
===========
The following is a reconciliation of the equity of SFFed to the fair value of the
net assets to be acquired by the Bank:
Equity of SFFed at December 31, 1995 ..................... $195,390
Fair value adjustments (b):
Mortgage-backed securities .............................. $ 9,915
Loans receivable, net ................................... (23,415)
Office premises and equipment, net ...................... (8,844)
Mortgage servicing rights ............................... 13,817
Core deposit intangible asset ........................... 25,700
Deposit accounts ........................................ (10,950)
Borrowings .............................................. (12,470)
Historical goodwill ..................................... (8,054)
----------- ----------
(14,301) (14,301)
----------
Fair value of net assets acquired ....................... 181,089
Purchase cost ........................................... 272,132
----------
Excess of purchase cost over net assets acquired
("goodwill") ........................................... $ 91,403
==========
</TABLE>
(a) Represents cash to be received by SFFed in settlement of stock
options and stock appreciation rights outstanding as of December 31, 1995
(553,304 options outstanding at an average price of $13.42 per share).
32
<PAGE>
THE ISSUER
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF
FINANCIAL CONDITION -- CONTINUED
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(b) Fair value adjustments are amortized against (accreted to) net
income as follows:
<TABLE>
<CAPTION>
PERIOD OF AMORTIZATION
ITEM METHOD OF AMORTIZATION (ACCRETION) (ACCRETION)
- --------------------------------- ------------------------------------------- --------------------------
<S> <C> <C>
Mortgage-backed securities Level yield method over effective terms of
such assets, considering estimated
prepayments 6 to 9 years
Loans receivable Level yield method over effective terms of
such assets, considering estimated
prepayments 2 to 12 years
Mortgage servicing rights Level yielding method over effective terms
of such assets, considering estimated
prepayments 2 to 7 years
Core deposit intangible asset Method based on the estimated lives of
existing depositor relationships 7 to 10 years
Deposit accounts Level yield method over stated terms of
such liabilities 1 to 5 years
Borrowings Level yield method over stated terms of
such liabilities 1 to 5 years
</TABLE>
(2) Represents payment by First Nationwide in connection with the SFFed
Acquisition. The purchase price will be paid from existing cash of SFFed and
the Issuer.
(3) Represents the elimination of the equity of SFFed of $181,089.
(4) The LMUSA 1996 Purchase will be accounted for using the purchase method
of accounting. The total purchase cost will be allocated first to the
tangible and identifiable intangible assets based on their respective fair
values and the remainder, if any, will be allocated to goodwill. The
aggregate purchase price was determined as follows:
<TABLE>
<CAPTION>
GROSS PURCHASE PRICE ........................... $178,260
<S> <C>
Adjustments to gross purchase price, net (i) (20,732)
----------
Purchase cost as of December 31, 1995 ....... 157,528
Acquisition fees and expenses ................ 8,000
----------
Total ....................................... $165,528
==========
</TABLE>
(i) The gross purchase price amount in the agreement is based on account
and loan portfolio balances as of July 31, 1995 and is adjusted based on
subsequent changes in the balances.
33
<PAGE>
THE ISSUER
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF
FINANCIAL CONDITION -- CONTINUED
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
The following is a reconciliation of the excess of the assets acquired
over the liabilities assumed (at LMUSA's historical carrying value) to the
recorded value of the net assets to be acquired by the Bank:
<TABLE>
<CAPTION>
<S> <C>
Excess of assets acquired over liabilities assumed
at December 31, 1995, at LMUSA's historical
carrying value ..................................... $149,571
Fair value adjustments--mortgage servicing rights .. 15,957
----------
Recorded value of net assets acquired .............. $165,528
==========
</TABLE>
(5) Represents the balance of funds in custodial accounts maintained by LMUSA
at other banks related to the servicing acquired in the LMUSA 1996 Purchase.
For pro forma purposes, it is assumed that such funds will be transferred to
the Bank and used to pay the amount due at closing and to liquidate
borrowings as follows:
<TABLE>
<CAPTION>
<S> <C>
Total amount of custodial funds transferred. $341,360
Less: Cash paid at closing ................. 49,750
----------
Amount applied to reduce borrowings ...... $291,610
==========
</TABLE>
(6) Represents payment by the Bank in connection with the LMUSA 1996
Purchase. The agreement for the LMUSA 1996 Purchase includes an initial cash
payment with deferred payments of the remainder of the contractual purchase
price.
<TABLE>
<CAPTION>
<S> <C>
Total purchase price ................... $165,528
Less: Acquisition fees and expenses (i) 8,000
----------
Purchase cost ........................ $157,528
==========
Deferred payment amount (i) ............ $107,778
Cash paid at closing ................... 49,750
----------
$157,528
==========
</TABLE>
(i) Represents $115,778 recorded in other liabilities as a result of the
LMUSA 1996 Purchase.
(7) Represents the elimination of the excess of assets acquired over
liabilities assumed totalling $165,528.
34
<PAGE>
THE ISSUER
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF
FINANCIAL CONDITION -- CONTINUED
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(8) The following represents adjustments necessary to record the Branch
Sales:
<TABLE>
<CAPTION>
CARRYING VALUE AS OF DECEMBER 31, 1995
-----------------------------------------------------------
OHIO MICHIGAN NORTHEAST TOTAL
-------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Cash and cash equivalents ....... $ 9,195 $ 4,355 $ 9,099 $ 22,649
Loans receivable ................. 1,045 597 4,143 5,785
Office premises and equipment ... 8,240 7,715 14,951 30,906
Deposits ......................... (1,414,695) (783,965) (2,496,962) (4,695,622)
Core deposit intangible asset ... (865) 1,229 665 1,029
-------------- ------------ -------------- -------------
Net carrying value of assets and
liabilities sold ............... $(1,397,080) $(770,069) $(2,468,104) $(4,635,253)
============== ============ ============== =============
</TABLE>
(9) Represents borrowings necessary to fund the Branch Sales, computed as
follows:
<TABLE>
<CAPTION>
OHIO MICHIGAN NORTHEAST TOTAL
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net carrying value of assets and
liabilities sold ............... $1,397,080 $770,069 $2,468,104 $4,635,253
Gain on sale--see Note 10 ...... 129,602 55,060 181,613 366,275
------------ ---------- ------------ ------------
Borrowings ..................... $1,267,478 $715,009 $2,286,491 $4,268,978
============ ========== ============ ============
</TABLE>
(10) Represents pro forma gain on the Branch Sales, computed as follows:
<TABLE>
<CAPTION>
OHIO MICHIGAN NORTHEAST TOTAL
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Deposit totals at December 31, 1995 $1,414,695 $783,965 $2,496,962 $4,695,622
Premium per contract ................ 9.10% 7.18% 7.30% 7.82%
------------ ---------- ------------ ------------
Total premium ...................... 128,737 56,289 182,278 367,304
Core deposit intangible asset ..... 865 (1,229) (665) (1,029)
------------ ---------- ------------ ------------
Gain on sale of deposits (a) ...... 129,602 55,060 181,613 366,275
Tax effect (other liabilities) .... (10,368) (4,405) (14,529) (29,302)
------------ ---------- ------------ ------------
Net gain .......................... $ 119,234 $ 50,655 $ 167,084 $ 336,973
============ ========== ============ ============
</TABLE>
(a) The remaining assets and liabilities will be sold at their respective
carrying values, resulting in no gain or loss.
(11) Represents the issuance of the Notes:
<TABLE>
<CAPTION>
<S> <C>
Proceeds from the issuance of the Notes $140,000
Less: deferred issuance costs .......... 7,000
----------
Net proceeds ......................... $133,000
==========
</TABLE>
35
<PAGE>
THE ISSUER
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
SFFED LMUSA
ACQUISITION PURCHASES BRANCH SALES
ISSUER PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
HISTORICAL TOTALS(1) TOTALS(2) TOTALS(3) ADJUSTMENTS(4) COMBINED
------------ ------------- ----------- -------------- --------------
- ------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable .............................. $ 823,864 $230,713 $22,477 $ (623) $ -- $1,076,431
Securities .................................... 28,396 10,685 -- -- -- 39,081
Mortgage-backed securities .................... 212,880 62,403 -- -- -- 275,283
Other interest income ......................... 10,705 -- -- -- -- 10,705
------------ ------------- ----------- -------------- -------------- ----------
Total interest income ........................ 1,075,845 303,801 22,477 (623) -- 1,401,500
INTEREST EXPENSE:
Deposits ...................................... 447,359 143,797 -- (211,530) -- 379,626
Borrowings .................................... 287,456 74,587 2,018 280,671 12,775 657,507
------------ ------------- ----------- -------------- -------------- ---------
Total interest expense ....................... 734,815 218,384 2,018 69,141 12,775 1,037,133
------------ ------------- ----------- -------------- -------------- ---------
Net interest income ........................... 341,030 85,417 20,459 (69,764) (12,775) 364,367
Provision for loan losses ..................... 37,000 11,094 -- -- -- 48,094
------------ ------------- ----------- -------------- -------------- ---------
Net interest income after provision for loan
losses ....................................... 304,030 74,323 20,459 (69,764) (12,775) 316,273
NONINTEREST INCOME:
Customer banking fees ......................... 47,493 5,291 -- (22,228) -- 30,556
Mortgage banking operations ................... 70,265 860 76,445 -- -- 147,570
Net gain (loss) on sales of assets ............ 147 -- (1,851) -- -- (1,704)
Other ......................................... 33,068 1,677 2,690 (789) -- 36,646
------------ ------------- ----------- -------------- -------------- ---------
Total noninterest income ..................... 150,973 7,828 77,284 (23,017) -- 213,068
NONINTEREST EXPENSE:
Compensation and benefits ..................... 154,288 11,141 19,500 (19,476) -- 165,453
Other ......................................... 178,265 34,896 38,081 (25,823) 1,000 226,419
------------ ------------- ----------- -------------- -------------- --------
Total noninterest expense .................... 332,553 46,037 57,581 (45,299) 1,000 391,872
------------ ------------- ----------- -------------- -------------- --------
Income (loss) before income taxes,
extraordinary item and minority interest .... 122,450 36,114 40,162 (47,482) (13,775) 137,469
Federal and state income taxes ................ (57,185) 3,554 3,952 (4,671) (1,355) (55,705)
------------ ------------- ----------- -------------- -------------- --------
Income (loss) before extraordinary item and
minority interest ............................ 179,635 32,560 36,210 (42,811) (12,420) 193,174
Extraordinary item--gain on early
extinguishment of FHLB advances, net ........ 1,967 -- -- -- -- 1,967
------------ ------------- ----------- -------------- -------------- --------
Net income (loss) before minority interest ... 181,602 32,560 36,210 (42,811) (12,420) 195,141
------------ ------------- ----------- -------------- -------------- --------
Minority interest--First Nationwide Bank
preferred stock dividends .................... 34,584 -- -- -- -- 34,584
------------ ------------- ----------- -------------- -------------- --------
Net income (loss) ............................. $ 147,018 $ 32,560 $36,210 $ (42,811) $(12,420) $160,557
============ ============= =========== ============== ============== ========
PRO FORMA SUPPLEMENTAL INFORMATION:
Income (loss) before income taxes,
extraordinary item and minority interest .... $ 122,450 $ 36,114 $40,162 $ (47,482) $(13,775) $137,469
Interest and other expense on Senior Notes (a) 25,539 -- -- -- -- 25,539
Interest and other expense on Notes (a) ...... -- -- -- -- 13,775 13,775
------------ ------------- ----------- -------------- -------------- --------
Total (b) ................................. $ 147,989 $ 36,114 $40,162 $ (47,482) $ -- $176,783
============ ============= =========== ============== ============== ========
</TABLE>
(a) Represents interest expense and amortization of debt issuance costs.
(b) Represents income (loss) before income taxes, extraordinary item,
minority interest and interest and other expenses on Senior Notes and
Notes.
36
<PAGE>
THE ISSUER
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(1) Represents historical results of operations of SFFed for the year
ended December 31, 1995. Historical results have been adjusted to
reflect:
(a) the amortization/accretion of fair value adjustments;
(b) the elimination of amortization of historical goodwill;
(c) the elimination of certain noninterest expenses due to consolidation
of SFFed operations with the Bank;
(d) the elimination of certain historical noninterest expenses recorded by
SFFed as a result of the acquisition by the Bank; and
(e) income taxes relative to the SFFed Acquisition.
(2) Represents historical unaudited results of operations for the nine
months ended September 30, 1995 and the year ended December 31, 1995
related to the LMUSA 1995 Purchase and LMUSA 1996 Purchase,
respectively. (The LMUSA 1995 Purchase was consummated October 2,
1995). Historical results have been adjusted to reflect:
(a) the amortization of the fair value of mortgage servicing rights;
(b) the elimination of amortization of historical mortgage servicing
rights;
(c) the decrease in interest expense resulting from the transfer of
custodial accounts acquired to the Bank;
(d) decreases in compensation and benefits expense due to reduction in
staffing;
(e) the elimination of certain other noninterest expenses due to
consolidation with First Nationwide's existing mortgage banking
operations; and
(f) income taxes relative to the LMUSA Purchases.
(3) Represents adjustments necessary to record the impact of the Branch
Sales:
(a) the elimination of historical interest income and expense for the year
ended December 31, 1995 on the savings account loans and deposits being
sold;
(b) the elimination of historical noninterest income (customer banking
fees and other noninterest income) for the year ended December 31, 1995
related to the deposits being sold;
(c) the elimination of historical noninterest expense for the year ended
December 31, 1995, including compensation and benefits, occupancy, SAIF
insurance premiums, marketing, OTS assessments, data processing and
telecommunications directly attributable to the Ohio, Michigan, and
Northeast retail branch operations;
(d) interest expense for the borrowings used to fund the Branch Sales; and
(e) income taxes relative to the Branch Sales. Branch Sales consummated
through March 31, 1996 have been funded with a mix of FHLB (as defined
herein) advances and reverse repurchase agreements at a weighted average
rate of 5.45%, compared to 6.79% used in the pro forma data which is
based on blended borrowing rates during 1995. Applying the actual
average rate to the additional borrowings used to fund the Branch Sales
has the effect of decreasing the pro forma interest expense on
borrowings by $49,882 on an after-tax basis.
(4) Represents adjustment to reflect:
(a) interest expense and amortization of debt issuance costs associated
with the Notes of $12,775 and $1,000, respectively; and
(b) the impact on income taxes from (a).
37
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The Issuer is a holding company whose only significant asset is all of the
common stock of First Nationwide. As such, the Issuer's principal business
operations are conducted by First Nationwide and its subsidiaries. The
selected historical financial data for the Issuer presented under the
captions "Selected Operating Data" and "Selected Financial Data" for, and as
of the end of, each of the years in the five-year period ended December 31,
1995, have been derived from the Consolidated Financial Statements of the
Issuer.
The following data should be read in conjunction with the Consolidated
Financial Statements of the Issuer and the notes thereto, the Consolidated
Financial Statements of the FNB Acquired Business and the notes thereto and
the Consolidated Financial Statements of SFFed and the notes thereto included
elsewhere in this Prospectus. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1994 (1) 1993 (2) 1992 (3) 1991
------------ ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA
Interest income ........................... $1,075,845 $293,139 $ 95,264 $659,201 $990,596
Interest expense .......................... 734,815 199,845 74,728 450,240 663,016
Net interest income ....................... 341,030 93,294 20,536 208,961 327,580
Provision for loan losses ................. 37,000 6,226 1,402 16,193 17,698
Noninterest income ........................ 150,973 41,158 190,876 384,336 128,366
Noninterest expense ....................... 332,553 96,298 63,392 361,549 464,624
Income (loss) before taxes, extraordinary
item and minority interest ............... 122,450 31,928 146,618 215,555 (26,376)
Income tax (benefit) expense (4) .......... (57,185) 2,558 2,500 -- --
Income (loss) before extraordinary item
and minority interest .................... 179,635 29,370 144,118 215,555 (26,376)
Extraordinary item: gain on early
extinguishment of FHLB advances, net .... 1,967 1,376 -- -- --
Net income (loss) before minority interest 181,602 30,746 144,118 215,555 (26,376)
Minority interest--First Nationwide Bank
preferred stock dividends ................ 34,584 -- -- -- --
Net income (loss) ......................... 147,018 30,746 144,118 215,555 (26,376)
SELECTED PERFORMANCE RATIOS
Return (loss) on average assets (5) ...... 1.00% .69% 7.84% 2.52% (0.25)%
Return (loss) on average common
equity (6) ............................... 39.33 16.05 69.41 58.89 (6.64)
Yield on interest-earning assets (7) ..... 7.71 6.85 5.42 8.32 9.99
Cost of interest-bearing liabilities (8) . 5.35 4.83 4.70 5.73 6.78
Net interest margin (9) ................... 2.44 2.18 1.14 2.63 3.30
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND MINORITY INTEREST--FIRST
NATIONWIDE BANK PREFERRED STOCK
DIVIDENDS (10)
Excluding interest on deposits (11) ...... 1.27x 1.32x 9.59x 10.74x --
Including interest on deposits (11) ...... 1.11x 1.16x 3.02x 1.46x --
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------
1995 1994 (1) 1993 (2) 1992 (3) 1991
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA
Securities available for sale (12) .. $ 1,826,075 $ 45,000 $ -- $ -- $ --
Securities held to maturity (12)(13) 1,455 411,859 15,118 2,034,842 90,416
Mortgage-backed securities to be held
to maturity (12) .................... 1,524,488 3,153,812 341,224 77,622 1,771,168
Loans receivable, net ................ 8,831,018 9,966,886 29,244 777,265 2,541,600
Covered assets, net .................. 39,349 311,603 592,593 839,538 1,398,906
Total assets ......................... 14,646,245 14,683,559 1,125,222 8,961,473 10,178,061
Deposits ............................. 10,241,628 9,196,656 431,778 7,809,478 9,148,901
Securities sold under agreements to
repurchase .......................... 969,510 1,883,490 119,144 30,647 305,000
Borrowings ........................... 2,392,862 2,808,979 440,792 597,564 192,117
Total liabilities .................... 13,883,099 14,029,957 1,012,328 8,488,697 9,761,664
Minority interest--preferred stock of
First Nationwide Bank ............... 300,730 300,730 -- -- --
Stockholders' equity ................. 462,416 352,872 112,894 472,776 416,397
REGULATORY CAPITAL RATIOS OF THE BANK
Tangible capital ..................... 5.84% 5.50% 9.50% 4.59% 3.37%
Core capital ......................... 5.84 5.50 9.50 5.13 3.88
Risk-based capital:
Core capital ........................ 9.14 8.86 67.71 15.67 12.39
Total capital ....................... 11.34 11.01 68.97 16.24 13.09
SELECTED OTHER DATA
Number of full service customer
facilities .......................... 160 156 4 162 162
Loans serviced for others (14) ...... $28,170,543 $ 7,475,119 $ 327,449 $10,156,020 $ 4,466,467
Approximate number of employees ..... 3,619 3,573 317 3,030 2,693
Non-performing assets as a percentage
of the Bank's total assets .......... 1.50% 1.49% 0.98% 0.12% 0.53%
</TABLE>
- ------------
(1) On October 3, 1994, effective immediately following the close of
business on September 30, 1994, the Bank acquired assets with fair
values totalling approximately $14.1 billion and liabilities
(including deposit liabilities) with fair values totalling
approximately $13.4 billion from Old FNB.
(2) During the first quarter of 1993, the Issuer sold certain assets,
liabilities, and substantially all of its branch operations located
in Texas, including $829 million of loans and 130 branches with $6.9
billion in deposits, in the First Gibraltar Texas Sale. A net gain
of $141 million was recorded in connection with this sale.
(3) During the last quarter of 1992, the Issuer sold certain assets,
liabilities, and branch operations located in Oklahoma, including $3
million of loans and 27 branches with $809 million in deposits, in
the First Gibraltar Oklahoma Sale. The increase in noninterest
income in 1992 was primarily attributable to the gain of $203
million on sales of assets in anticipation of the First Gibraltar
Texas Sale, the gain of $19 million on the First Gibraltar Oklahoma
Sale and a gain of $41 million as a result of the modification of
the Assistance Agreement.
(4) Utilization of net operating loss carryovers resulted in no
provisions for income taxes until the FN Acquisition. Income tax
expense of $2.5 million was recorded in the first quarter of 1993
representing AMT expense related to the gain recognized on the First
Gibraltar Texas Sale (see Footnote 2). Income tax expense recorded
in 1994 after the FN Acquisition represents federal AMT reduced, to
the extent of 90%, by net operating loss carryovers, and state tax
at an assumed rate of 8%. Income tax benefit in 1995 includes the
recognition of a deferred tax benefit of $69 million, offset by
federal AMT tax reduced, to the extent of 90%, by net operating loss
carryovers and state tax at an assumed rate of 8%.
(5) Return (loss) on average assets represents net income (loss) as a
percentage of average assets.
(6) Return (loss) on average common equity represents net income (loss)
available to common stockholders as a percentage of average common
equity.
39
<PAGE>
(7) Yield on interest-earning assets represents interest income as a
percentage of average interest-earning assets.
(8) Cost of interest-bearing liabilities represents interest expense as
a percentage of average interest-bearing liabilities.
(9) Net interest margin represents net interest income as a percentage
of average interest-earning assets.
(10) Earnings used in computing the ratio of earnings to combined fixed
charges and minority interest--First Nationwide Bank preferred stock
dividends consist of income before taxes, extraordinary item and
minority interest. Fixed charges consist of interest expense on
borrowings, the interest component of lease expense and, where
indicated, interest expense on deposits.
(11) Earnings were insufficient to cover fixed charges in 1991 by $26.4
million excluding interest on deposits, and $26.4 million including
interest on deposits.
(12) Fluctuation in securities and mortgage-backed securities held to
maturity and securities available for sale from December 31, 1994 to
December 31, 1995 resulted from the reclassification of
substantially all securities and mortgage-backed securities (except
for mortgage-backed securities resulting from the securitization
with recourse of certain of the Bank's loans) from held-to-maturity
to securities available for sale.
(13) Increase in securities to be held to maturity at December 31, 1992
resulted from the investment of proceeds on sale of certain
long-term interest-bearing assets, primarily loans and
mortgage-backed securities, in cash, cash equivalents and securities
in anticipation of the First Gibraltar Texas Sale.
(14) Includes loans serviced by FNMC, the Bank, and FGB Realty, excluding
loans serviced for the Bank by FNMC.
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Issuer and the notes thereto
included elsewhere in this Prospectus. The Issuer is a holding company with
no business operations of its own. Accordingly, except as otherwise
indicated, the following discussion of the Issuer relates to the Bank.
GENERAL
The Issuer's principal business consists of operating retail deposit
branches and originating and/or purchasing residential real estate loans and,
to a lesser extent, certain consumer loans, for investment. The Issuer
actively manages its commercial real estate loan portfolio and is active in
mortgage banking and loan servicing. Revenues are derived primarily from
interest charged on loans, interest received on government and agency
securities and mortgage-backed securities, gains on sales of loans and other
investments, and fees received in connection with loan servicing, securities
brokerage and other customer service transactions. Expenses primarily consist
of interest on customer deposit accounts, interest on short-term and
long-term borrowings, provisions for losses, general and administrative
expenses consisting of compensation and benefits, advertising and marketing,
premises and equipment, communications, deposit insurance assessments, data
processing and other general and administrative expenses.
Impact of Acquisitions and Dispositions
The FN Acquisition was consummated on October 3, 1994, effective
immediately after the close of business on September 30, 1994, and was
recorded using the purchase method of accounting. Accordingly, the
accompanying financial data include the results of operations related to the
approximately $14.1 billion in assets and $13.4 billion in liabilities
acquired in the FN Acquisition. Minority interest increased by $301 million
due to the issuance of the Bank Preferred Stock, and common stockholders'
equity increased by $240 million during 1994 due principally to 1994 earnings
of $31 million and the capital contribution of approximately $210 million by
Holdings in exchange for 230.3 shares of the Issuer's class C common stock.
See the Consolidated Financial Statements of the FNB Acquired Business and
the notes thereto included elsewhere in the Prospectus.
On February 28, 1995, FNMC consummated the Maryland Acquisition and
acquired a loan servicing portfolio of approximately $11.4 billion, including
a subservicing portfolio of $1.8 billion, and certain assets and liabilities
from StanFed for approximately $178 million. The transaction was accounted
for as a purchase, and the Issuer's consolidated statement of operations for
the year ended December 31, 1995 includes the results of operations of the
acquired mortgage servicing operation for the period from March 1, 1995
through December 31, 1995.
In April 1995, First Nationwide acquired approximately $13 million in
deposits located in Tiburon, California in the Tiburon Purchase. In August
1995, the Bank acquired three retail branches located in Orange County,
California with deposit accounts totalling approximately $356 million in the
ITT Purchase. On December 8, 1995, the Bank acquired four retail branches
with deposit accounts of approximately $144 million in the Sonoma Purchase.
The Branch Purchases were accounted for as purchases, and the results of
operations of the acquired retail deposit operations are included in the
Issuer's consolidated statement of operations for the year ended December 31,
1995 from the date each of the transactions was consummated.
On October 2, 1995, FNMC consummated the LMUSA 1995 Purchase and acquired
a loan servicing portfolio of approximately $11.1 billion (including a
sub-servicing portfolio of $3.1 billion), a master servicing portfolio of
$2.9 billion and other assets, principally existing loans and loan production
operations for approximately $100 million, payable in installments, and the
assumption of certain indebtedness secured by the acquired loan portfolio
totalling approximately $274 million. The LMUSA 1995 Purchase was accounted
for as a purchase and the Issuer's consolidated statement of operations for
the year ended December 31, 1995 includes the results of operations of the
acquired mortgage servicing operations for the period from October 3, 1995
through December 31, 1995.
The First Gibraltar Texas Sale was effective February 1, 1993 resulting in
the sale of $829 million of loans and $6.9 billion in deposits in 130
branches. The accompanying financial data for 1993 reflect the
41
<PAGE>
results of operations in 1993 including these sold assets and liabilities during
the first month of the year. Subsequent to the First Gibraltar Texas Sale, First
Nationwide managed four retail branches in Texas and supplemented the retail
deposit base with wholesale funds from Brokered Deposits and Federal Home
Loan Bank ("FHLB") advances.
Prior to and during 1993, most of the mortgage banking operations of the
Bank were conducted through First Gibraltar Mortgage Holdings, Inc. ("FGMH")
prior to the distribution by the Bank of the stock of FGMH to its then
immediate parent in the first quarter of 1993. Therefore, the accompanying
financial data for 1993 reflect the results of such mortgage banking
operations during 1993 prior to the distribution. See
"Business--General--Background."
Accrued Termination and Facilities Costs
During 1995, the Issuer recorded $12.7 million in noninterest expense
related to four specific actions. In connection with the Maryland
Acquisition, the former residential loan servicing center in Sacramento,
California was relocated to Maryland, resulting in a charge of $5.7 million
for employee termination and facilities costs, net of expected sublease
income. Additionally, $2.1 million has been provided for employee termination
and facilities costs (net of expected sublease income) related to the closing
of the Issuer's residential loan production offices. The Issuer has also
recorded a charge of $4.0 million related to employee termination benefits
for positions which will be eliminated over the next twelve months in
conjunction with the Bank's cost reduction plan. In connection with the
elimination of these positions, the Bank has identified opportunities for
office space consolidation and has established additional liabilities
totalling $.4 million for lease termination payments. Additionally, the Bank
has identified certain of its retail banking facilities which will be closed
and marketed for sale, with the related operations consolidated into other
retail banking facilities acquired in the ITT Purchase. In connection with
such closures and consolidations, a liability totalling $.5 million was
established to record such facilities at fair value.
Accounting Changes
The Issuer adopted SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures," effective January
1, 1995. Under SFAS No. 114, a loan is impaired when it is "probable" that a
creditor will be unable to collect all amounts due (i.e., both principal and
interest) according to the contractual terms of the loan agreement. The
measurement of impairment may be based on: (i) the present value of the
expected future cash flows of the impaired loan discounted at the loan's
original effective interest rate, (ii) the loan's observable market price, or
(iii) the fair value of the loan's collateral. SFAS No. 114 does not apply to
large groups of smaller balance homogeneous loans that are collectively
evaluated for impairment. For the Issuer, loans collectively reviewed for
impairment include all single family loans and performing multi-family and
commercial real estate loans under $500,000, excluding loans which have
entered the workout process. The adoption of SFAS No. 114, as amended by SFAS
No. 118, had no material impact on the Issuer's Consolidated Financial
Statements as the Issuer's existing policy of measuring loan impairment is
consistent with methods prescribed in these standards.
The Issuer considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Issuer will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Any insignificant delay (i.e., 60 days or less) or
insignificant shortfall in amount of payments will not cause a loan to be
considered impaired. In determining impairment, the Issuer considers large
non-homogeneous loans including nonaccrual loans, troubled debt
restructurings, and performing loans which exhibit, among other
characteristics, high LTV ratios, low debt-coverage ratios or other
indications that the borrowers are experiencing increased levels of financial
difficulty. The Issuer bases the measurement of collateral-dependent impaired
loans on the fair value of their collateral. The amount, if any, by which the
recorded investment of the loan exceeds the measure of the impaired loan's
value is recognized by recording a valuation allowance.
Generally, specific allowances for loan losses relative to impaired
multi-family and commercial real estate loans, which comprised the majority
of impaired loans at December 31, 1995, have not been established because
most would be eligible to be sold to Granite under the Put Agreement. There
have not been any significant multi-family or commercial real estate loans
originated since October 1, 1994.
At December 31, 1995, the carrying value of loans that are considered to
be impaired under SFAS No. 114 totalled $125.4 million (of which $29.6
million were on nonaccrual status). The average recorded
42
<PAGE>
investment in impaired loans during the year ended December 31, 1995, was
approximately $125.5 million. For the year ended December 31, 1995, the Issuer
recognized interest income on these impaired loans of $12.9 million, which
included $.2 million of interest income recognized using the cash basis method
of income recognition.
On May 12, 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights, an amendment to Statement No. 65." This statement provides
guidance for the recognition of mortgage servicing rights as an asset when a
mortgage loan is sold or securitized and servicing rights are retained. The
Issuer adopted this standard effective April 1, 1995. The result of such
adoption was to capitalize approximately $17 million in mortgage servicing
rights originated by the Issuer in 1995.
SFAS No. 122 requires that a portion of the cost of originating a mortgage
loan be allocated to the mortgage servicing rights based on its fair market
value. To determine the fair value of the servicing rights created since
April 1, 1995, the Issuer used the market prices under comparable servicing
sale contracts, when available, or alternatively, used a valuation model that
calculates the present value of future net servicing income. In using this
valuation method, the Issuer incorporated assumptions that market
participants would use in estimating future net servicing income which
included estimates of the cost of servicing, the discount rate, mortgage
escrow earnings rate, an inflation rate, ancillary income, prepayment speeds
and default rates and losses. Originated mortgage servicing rights totalling
$16.8 million were recorded during the year ended December 31, 1995.
Also, SFAS No. 122 requires enterprises to measure the impairment of
servicing rights based on the difference between the carrying amount of the
servicing rights and their current fair value. In determining impairment, the
Issuer aggregates all mortgage servicing rights and stratifies them based on
the predominant risk characteristics of interest rate, loan type and investor
type. Further, mortgage servicing rights capitalized prior to the adoption of
SFAS No. 122 were stratified by acquisition to measure impairment. A
valuation allowance is established for any excess of amortized book value
over the current fair value, by risk stratification, by a charge to income.
Based on this analysis, no allowance for loss on impairment of loan servicing
rights was necessary at December 31, 1995.
Effective January 1, 1994, the Issuer adopted SFAS No. 115. SFAS No. 115
directs that securities held to maturity be reported at amortized cost.
Securities bought and held principally for the purpose of selling them in the
near term are classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings. All other securities
held for investment purposes are classified as held for sale and are carried
at fair value, with unrealized gains and losses excluded from earnings and
reported in a separate component of stockholders' equity, net of tax. There
was no impact on the Consolidated Financial Statements of the Issuer as a
result of such adoption. At December 31, 1994, all U.S. government and agency
securities and mortgage-backed securities were classified in the
held-to-maturity portfolio.
On November 15, 1995, the FASB issued the Special Report, which provided
all entities an opportunity to reconsider their ability and intent to hold
securities to maturity and allowed a one-time reclassification of securities
from held to maturity to available for sale without "tainting" the remaining
held-to-maturity securities. On December 29, 1995, the Issuer reclassified
$1.5 billion and $231.8 million in carrying value of mortgage-backed
securities and U.S. government and agency securities, respectively, from the
respective held-to-maturity categories to securities available-for-sale,
resulting in a net after-tax increase of $22.5 million in stockholders'
equity. There was no impact on the Bank's regulatory capital as a result of
this reclassification.
The Issuer adopted SFAS No. 109, "Accounting for Income Taxes" effective
January 1, 1993. Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. There
was no impact on the Consolidated Financial Statements of the Issuer as a
result of such adoption.
As of December 31, 1994, the Issuer recorded a valuation allowance for
100% of the net deferred tax asset because at that time it was not more
likely than not that such deferred tax asset would be realized. Based on a
favorable earnings trend since the consummation of the FN Acquisition and
future earnings expectations, management changed its judgment about the
realizability of the Issuer's net deferred tax
43
<PAGE>
assets and recognized a deferred tax benefit of $69 million in the fourth
quarter of 1995. Management believes that the realization of such asset is more
likely than not, based upon the expectation that the Issuer will generate the
necessary amount of taxable income in future periods.
RECENT DEVELOPMENTS
On May 15, 1996, the Issuer reported its operating results for the three
months ended March 31, 1996. Net income for the three months ended March 31,
1996 was $298.6 million (which included $283.3 million in gains, net of taxes,
on sales of branches) compared with net income of $17.4 million for the
comparable period in 1995 (which included $2.0 million in extraordinary gains,
net of taxes, from the early extinguishment of FHLB advances). Net interest
income before provision for loan losses was $108.1 million for the three months
ended March 31, 1996 compared with $80.2 million for the comparable period in
1995. Noninterest income for the three months ended March 31, 1996 was $364.9
million, an increase of $333.9 million from the comparable period in 1995.
Noninterest expense for the three months ended March 31, 1996 was $118.2
million, an increase of $37.9 million from the comparable period in 1995. During
the three months ended March 31, 1996, consolidated total assets increased $3.2
billion, to $17.8 billion, from December 31, 1995, due to the assets acquired in
the SFFed Acquisition and the LMUSA 1996 Purchase. During the same period,
consolidated total liabilities increased $2.9 billion, primarily due to
additional liabilities assumed in the SFFed Acquisition and the issuance of the
Notes.
Except for the transactions for which pro forma information has been
provided in this Prospectus, there have not been any material trends, events or
transactions subsequent to December 31, 1995 that would materially affect the
Issuer's financial condition and results of operations.
PRO FORMA FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the pro forma condensed combined statement of
financial condition at December 31, 1995 and the pro forma condensed combined
statement of operations for the year ended December 31, 1995 gives effect to
the Acquisitions, the Branch Sales and the Offering and should be read in
conjunction with the Unaudited Pro Forma Financial Data included elsewhere in
this Prospectus. The Branch Purchases consummated in 1995 and the proposed
Home Federal Acquisition have not been reflected in the pro forma financial
data because such transactions are not material either individually or in the
aggregate.
Pro Forma Statement of Financial Condition
The SFFed Acquisition, the LMUSA 1996 Purchase, the Branch Sales and the
Offering have a significant effect, on a pro forma basis, on the Issuer's
1995 historical consolidated statement of financial condition. Total assets
increase $4.1 billion, or 28%, from $14.6 billion historical to $18.7 billion
pro forma combined.
Cash and cash equivalents increase by approximately $33 million,
principally as a result of the proceeds from the issuance of the Notes in the
Offering and cash acquired in the SFFed Acquisition, offset by payment made
in connection with the purchase price of SFFed.
Mortgage-backed securities increase by approximately $942 million.
Loans receivable increase approximately $2.7 billion, including
approximately $1.5 billion of 1-4 unit residential loans, approximately $628
million of multi-family residential loans, approximately $465 million of
commercial real estate loans, and approximately $100 million of principally
consumer loans. The majority of these loans are adjustable rate mortgage
loans and are collateralized with properties located in California.
MSRs increase approximately $122 million, principally as a result of the
LMUSA 1996 Purchase, which is expected to add a loan servicing portfolio of
approximately $14.1 billion and 268,000 loans.
Core deposit and other intangible assets increase by approximately $116
million as a result of the purchase accounting applied in the SFFed
Acquisition, offset by the reduction of core deposit intangible assets in
connection with the Branch Sales.
Other assets increase by approximately $182 million as a result of other
assets (primarily notes receivable, other real estate, servicing-related
receivables and miscellaneous other assets) acquired in the SFFed Acquisition
and the LMUSA 1996 Purchase, as well as deferred issuance costs in connection
with the Offering.
44
<PAGE>
Deposits decrease by approximately $1.6 billion, comprised of $2.7 billion
in deposits acquired in the SFFed Acquisition and $341 million in custodial
accounts transferred to the Bank in connection with the LMUSA 1996 Purchase,
offset by approximately $4.7 billion in deposits sold in the Branch Sales.
The Bank operated 160 full service branches in seven major metropolitan areas
at December 31, 1995. On a pro forma basis in connection with the Branch Sales
and the SFFed Acquisition, the Bank will operate 107 full service branches (80
of which will be in California) in four major metropolitan areas.
Borrowings increase by approximately $5.2 billion, including $1.1 billion
of borrowings assumed in connection with the SFFed Acquisition (principally
securities sold under agreements to repurchase and FHLB advances), a
reduction in borrowings of approximately $292 million as a result of the
transfer of custodial accounts to the Bank in connection with the LMUSA 1996
Purchase, additional borrowings necessary to fund the Branch Sales of
approximately $4.3 billion, and $140 million in Notes.
Other liabilities increase by approximately $209 million, principally
related to deferred payments of the purchase price in connection with the
LMUSA 1996 Purchase, deferred tax liabilities established in connection with
the Branch Sales, and other liabilities and accrued expenses assumed by the
Bank as part of the SFFed Acquisition.
Stockholders' equity increases by $337 million, representing the pro forma
gain on the Branch Sales, net of tax. The Bank continues to maintain its
"well capitalized" status on a pro forma basis at December 31, 1995.
Pro Forma Results of Operations
On a pro forma basis, the Issuer's historical net income for the year
ended December 31, 1995 increases approximately $13 million, or 9%, as a
result of the Acquisitions, the Branch Sales and the Offering. However,
Branch Sales consummated through March 31, 1996 have been funded with a mix
of FHLB advances and reverse repos at a weighted average rate of 5.45%,
compared to 6.79% used in the pro forma data which is based on blended
borrowing rates during 1995. Applying the actual average rate to the
additional borrowings used to fund the Branch Sales has the effect of
decreasing the pro forma interest expense on borrowings by approximately $50
million on an after tax basis.
Net interest income after provision for loan losses increases
approximately $12 million, due, in part, to the net effect of the
interest-earning assets acquired and the interest-bearing liabilities assumed
in the SFFed Acquisition. In addition, the loans receivable acquired as part
of the LMUSA Purchases contributed to this increase. The positive impact of
the SFFed Acquisition and the LMUSA Purchases is offset in part by the
additional interest expense on the Notes. In addition, the pro forma interest
expense on borrowings to replace deposits sold in the Branch Sales is
approximately $69 million higher than the interest expense on such deposits.
However, as noted above, Branch Sales consummated through March 31, 1996 have
been funded at a rate significantly lower than the rate used in the pro forma
data.
Noninterest income increases approximately $62 million, substantially all
of which relates to loan servicing fee income on the additional $26.8 billion
loan servicing portfolio acquired in connection with the LMUSA Purchases.
Noninterest expense increases approximately $59 million, principally due
to incremental expenses of operations acquired in the SFFed Acquisition and
the LMUSA Purchases, offset by the elimination of historical noninterest
expense directly attributable to the Ohio, Michigan and Northeast retail
branch operations. The pro forma results of operations for the SFFed
Acquisition include a $46 million reduction in noninterest expense over
historical SFFed levels relative to a staff reduction of approximately 60%,
the consolidation of ten branch offices and administrative facilities, the
elimination of nonrecurring historical expenses related to the SFFed
Acquisition and other economies of scale, offset in part by the amortization
of core deposit intangible and goodwill. Similarly, the pro forma results of
operations for the LMUSA Purchases include a $262 million reduction in
noninterest expense over historical LMUSA levels, representing the effect of
significant staff reductions, reductions in facilities costs due to
consolidation and the elimination of certain historical amounts related to
operations not acquired as part of the LMUSA Purchases.
RESULTS OF OPERATIONS
The year to year comparisons set forth below, including the changes in
magnitude of the various items between years, have been affected by the
acquisitions and dispositions consummated during the years involved.
45
<PAGE>
The following tables set forth, for the periods and at the dates
indicated, information regarding the Issuer's consolidated average statements
of financial condition, together with the total dollar amounts of interest
income and interest expense and the weighted average interest rates for the
periods presented. Average balances are calculated on a daily basis. The
information presented represents the historical activity of the Issuer.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
1995 1994 1993
-------------------------------- -------------------------------- --------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- ---------- --------- --------- ---------- --------- --------- ---------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets (1):
U.S. government and agency
securities held to maturity
(2)(3) ....................... $ 435 $ 28 6.42% $ 138 $ 7 4.95% $ 710 $24 3.43%
Mortgage-backed securities
held to maturity (3)(4) ..... 2,985 213 7.14 711 43 6.05 120 6 5.04
Loans held for sale ........... 304 24 7.89 11 1 5.22 -- -- --
Loans receivable, net (4) .... 10,058 800 7.95 2,926 212 7.27 124 16 12.67
Covered Assets, net (5) ...... 165 11 6.67 491 30 6.11 804 49 6.11
--------- ---------- --------- --------- ---------- --------- --------- -------- -----
Total interest-earning
assets ...................... 13,947 1,076 7.71% 4,277 293 6.85% 1,758 95 5.42%
--------- ---------- --------- --------- ---------- --------- --------- -------- -----
Noninterest-earning assets .... 751 161 81
--------- --------- ---------
Total assets ................. $14,698 $4,438 $1,839
========= ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
Deposits ...................... $ 9,959 447 4.49% $2,605 101 3.88% $1,197 55 4.59%
Securities sold under
agreements to repurchase .... 1,577 105 6.66 351 19 5.37 21 1 3.83
Borrowings (6) ................ 2,210 183 8.26 1,181 80 6.77 373 19 5.09
--------- ---------- --------- --------- ---------- --------- --------- -------- -----
Total interest-bearing
liabilities ................. 13,746 735 5.35% 4,137 200 4.83% 1,591 75 4.70%
--------- ---------- ========= ---------- ========= --------- -------- =====
Noninterest-bearing
liabilities ................... 277 53 40
Minority interest--preferred
stock of First Nationwide
Bank .......................... 301 75 --
Stockholders' equity ........... 374 173 208
--------- --------- ---------
Total liabilities and
stockholders' equity ........ $14,698 $4,438 $1,839
========= ========= =========
Net interest income ............. $ 341 $ 93 $20
========== ========== ========
Interest rate spread ............ 2.36% 2.02% .72%
========= ========= =====
Net interest margin ............. 2.44% 2.18% 1.14%
========= =========
Average equity to average assets 2.54% 3.90% 11.31%
========= ========= ======
</TABLE>
(1) Nonaccruing assets are included in the average balances for the periods
indicated.
(2) Includes interest-bearing deposits in other banks and short-term
investment securities.
(3) Substantially all securities held to maturity (except for
mortgage-backed securities resulting from the securitization with
recourse of certain of the Bank's loans) were reclassified to
securities available for sale on December 29, 1995. The average balance
of such securities for three days is not material and is therefore not
presented.
(4) In late December, 1994, $1.3 billion of single-family loans were
securitized with recourse. The large increase in the average balance of
mortgage-backed securities held to maturity from 1994 to 1995 is due to
such securitized loans.
(5) Includes unconsolidated subsidiaries covered by FSLIC/RF yield
maintenance.
(6) Interest and average rate include the impact of interest rate swaps.
46
<PAGE>
The following table presents certain information regarding changes in
interest income and interest expense of the Issuer during the periods
indicated. The dollar amount of interest income and interest expense
fluctuates depending upon changes in the respective interest rates and upon
changes in the respective amounts (volume) of the Issuer's interest-earning
assets and interest-bearing liabilities. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to: (i) changes in volume (changes in
average outstanding balances multiplied by the prior year's rate) and (ii)
changes in rate (changes in average interest rate multiplied by the prior
year's volume). Changes attributable to both volume and rate have been
allocated proportionately.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 VS. 1994 1994 VS. 1993
------------------------ -------------------------
INCREASE (DECREASE) DUE INCREASE (DECREASE) DUE
TO TO
------------------------ -------------------------
VOLUME RATE NET VOLUME RATE NET
-------- ------ ------ -------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Securities (1) ..................... $ 18 $ 3 $ 21 $(38) $21 $(17)
Mortgage-backed securities ......... 160 10 170 36 1 37
Loans held for sale ................ 23 0 23 1 0 1
Loans receivable, net .............. 566 22 588 200 (4) 196
Covered assets, net (2) ............ (22) 3 (19) (19) 0 (19)
-------- ------ ------ -------- ------ -------
Total ............................ 745 38 783 180 18 198
-------- ------ ------ -------- ------ -------
Interest Expense:
Deposits ........................... 328 18 346 53 (7) 46
Securities sold under agreements to
repurchase ........................ 80 6 86 18 0 18
Borrowings ......................... 82 21 103 53 8 61
-------- ------ ------ -------- ------ -------
Total ............................ 490 45 535 124 1 125
-------- ------ ------ -------- ------ -------
Change in net interest income .. $255 $(7) $248 $ 56 $17 $ 73
======== ====== ====== ======== ====== =======
</TABLE>
- ------------
(1) Includes interest-bearing deposits in banks and other short-term
investments.
(2) Includes unconsolidated subsidiaries covered by FSLIC/RF yield
maintenance.
The positive volume variance of $255 million from 1994 to 1995 is largely
due to $13.4 billion in interest-earning assets acquired offset in part by
the $13.3 billion in interest-bearing liabilities assumed in the FN
Acquisition on October 3, 1994, which contributed to net interest income
during the last quarter of 1994 and all of 1995. The negative rate variance
of $7 million is attributed to the interest-bearing liabilities acquired in
the FN Acquisition, which rates reflect the overall increase in market
interest rates from the fourth quarter of 1994 through 1995, and the issuance
of the Senior Notes to finance the FN Acquisition. In an increasing rate
environment, the Issuer's cost of interest-bearing liabilities reacts more
quickly to changes in rates than the yields on interest-bearing assets, due
to the volume of adjustable rate interest-bearing assets which generally
reprice on an annual or semi-annual basis.
The positive volume variance of $56 million from 1993 to 1994 is largely
due to the FN Acquisition, which resulted in $14 billion in interest-earning
assets contributing to net interest income during the last quarter of 1994.
In addition, the Senior Notes were issued to partially finance the FN
Acquisition. The positive total rate variance of $17 million is also
attributed to the FN Acquisition, as the majority of the interest-earning
assets acquired were variable-rate assets, reflecting the overall increase in
market interest rates from 1993 to 1994.
Year Ended December 31, 1995 versus Year Ended December 31, 1994
Net Income. The Issuer reported net income for 1995 of $147 million
compared with net income of $31 million for 1994. Net income for 1995
includes an income tax benefit of $57 million (largely due to the recognition
of a $69 million deferred tax benefit), and an extraordinary gain from the
early extinguishment of FHLB advances of $2.0 million, net of tax. Net income
for 1994 includes income tax expense totalling $2.6 million and $1.4 million,
net of tax, in extraordinary gain from the early extinguishment of FHLB
advances.
47
<PAGE>
The Issuer reported income before income taxes, extraordinary item and
minority interest of $122 million in 1995 compared with pre-tax income of $32
million in 1994. The increase is generally due to the inclusion in 1995 of
the operations acquired in the FN Acquisition for a full year compared to the
operations acquired in the FN Acquisition for only the fourth quarter of
1994.
Net interest income was $341 million for 1995, compared with $93 million
for 1994, an increase of $248 million. The increase is generally due to the
inclusion in 1995 of the operations acquired in the FN Acquisition for a full
year compared with the inclusion of the operations acquired in the FN
Acquisition for only the fourth quarter of 1994.
Interest Income. Total interest income was $1.1 billion for the year ended
December 31, 1995, an increase of $783 million from the year ended December
31, 1994.
The interest-bearing assets acquired in the FN Acquisition resulted in
total interest-earning assets for 1995 averaging $13.9 billion, compared to
$4.3 billion in 1994. In addition, the yield on total interest-earning assets
during 1995 increased .86% from the yield on total interest-earning assets
during 1994, principally due to changes in overall market interest rates and
higher yielding assets acquired in the FN Acquisition.
The Issuer earned $800 million of interest income on loans receivable for
the year ended December 31, 1995, an increase of $588 million from the year
ended December 31, 1994. The loans acquired in the FN Acquisition resulted in
an increase in the average balance of loans receivable to $10.1 billion from
$2.9 billion for the years ended December 31, 1995 and 1994, respectively.
The weighted average yield on loans receivable increased to 7.95% for 1995
from 7.27% during 1994, primarily due to the repricing of the adjustable rate
loans in the portfolio acquired in the FN Acquisition.
The Issuer earned $24 million of interest income on loans held for sale
for the year ended December 31, 1995, an increase of $23 million from the
year ended December 31, 1994. The additional loan production from the
Maryland Acquisition and the LMUSA 1995 Purchase resulted in an increase in
the average balance of loans held for sale to $304 million from $11 million
for the years ended December 31, 1995 and 1994, respectively. The weighted
average yield on loans held for sale increased to 7.89% for 1995 from 5.22%
during 1994.
Interest income on mortgage-backed securities was $213 million for the
year ended December 31, 1995, an increase of $170 million from the year ended
December 31, 1994. The mortgage-backed securities acquired in the FN
Acquisition, including $1.3 billion of qualifying single-family loans
securitized from the Bank's loan portfolio in late 1994 and an additional $.4
billion securitized in 1995, resulted in the average portfolio balances
increasing from $711 million to $3.0 billion during the years ended December
31, 1994 and 1995, respectively. The weighted average yield on
mortgage-backed securities increased to 7.14% for 1995 from 6.05% for 1994,
primarily due to the addition of higher-yielding securities from the FN
Acquisition, including loan securitizations, and the subsequent upward rate
adjustments of adjustable rate mortgage-backed securities related to an
overall increase in market interest rates.
Interest income from Covered Assets declined $19 million, to $11 million,
for the year ended December 31, 1995. This decline is due to a reduction in
the volume of Covered Assets, due to sales, repayments and other dispositions
of Covered Assets, including the purchase by the FDIC of substantially all of
the remaining Covered Assets at the fair market value of such assets (the
"FDIC Purchase"), offset in part by an increase in the effective rate earned
on such Covered Assets, which was 6.67% for 1995 compared to 6.11% for 1994.
The higher rate is due to the net effect of the increase in the Texas Cost of
Funds ("TCOF") between the two periods due to generally increasing interest
rates, partially offset by the reduction in the applicable margin over TCOF
prescribed in the Assistance Agreement.
Interest income from securities and interest-bearing deposits in banks was
$28 million for the year ended December 31, 1995, an increase of $21 million
from the year ended December 31, 1994. The average portfolio balances during
the years ended December 31, 1995 and 1994 increased to $435 million from
$138 million, respectively, due to the securities acquired in the FN
Acquisition being held for an entire year in 1995 versus the fourth quarter
only in 1994. The weighted average yield on these assets increased to 6.42%
for 1995 from 4.95% for 1994, primarily due to the increase in overall market
interest rates.
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Interest Expense. Total interest expense was $735 million for the year
ended December 31, 1995, an increase of $535 million from the year ended
December 31, 1994. The increase is generally due to the inclusion for a full
year in 1995 of the additional interest-bearing liabilities from the
operations acquired in the FN Acquisition, the issuance of the Senior Notes,
and changes in overall market rates of interest paid as discussed in more
detail below.
Interest expense on deposits, including Brokered Deposits, was $447
million for the year ended December 31, 1995, an increase of $346 million
from the year ended December 31, 1994. The deposits of approximately $10
billion acquired in the FN Acquisition, net of $1.2 billion in deposits sold
in the Illinois Sale, and the $513 million of deposits assumed in the Branch
Purchases, resulted in an increase in the average balance of deposits
outstanding from $2.6 billion to $10.0 billion for the years ended December
31, 1994 and 1995, respectively. The overall weighted average cost of
deposits increased from 3.88% for 1994 to 4.49% for 1995, due principally to
increases in the overall level of interest rates between the two years.
Interest expense on securities sold under agreements to repurchase and
borrowings totalled $288 million for the year ended December 31, 1995, an
increase of $189 million from the year ended December 31, 1994.
The timing of the FN Acquisition and the Illinois Sale, offset in part by
the reduction of borrowings from funds received in connection with the Branch
Purchases, resulted in the average balance outstanding of securities sold
under agreements to repurchase and borrowings for the years ended December
31, 1995 and 1994 increasing to $3.8 billion from $1.5 billion, respectively.
The weighted average interest rate on these instruments increased to 7.60% in
1995 from 6.46% for 1994, primarily due to the impact of increases in overall
market interest rates. The Senior Notes issued in 1994 resulted in an
additional $18 million in interest expense in 1995 compared to 1994.
Net Interest Income. Net interest income before provision for loan losses
was $341 million for the year ended December 31, 1995, an increase of $248
million from the year ended December 31, 1994. The interest rate spread
increased to 2.36% in 1995 from 2.02% in 1994. The increase in net interest
income is generally due to the inclusion in 1995 of the operations acquired
in the FN Acquisition for a full year compared to the inclusion of the
operations acquired in the FN Acquisition for only the fourth quarter of
1994.
Noninterest Income. Total noninterest income, consisting primarily of
mortgage banking, customer banking and management fee income, was $151
million for the year ended December 31, 1995, an increase of $110 million
from the year ended December 31, 1994. The increase is generally due to the
inclusion in 1995 of the operations acquired in the FN Acquisition for a full
year compared to the inclusion of the operations acquired in the FN
Acquisition for only the fourth quarter of 1994. In addition, additional fee
revenues were generated from operations acquired in the Maryland Acquisition
and the LMUSA 1995 Purchase.
Fees and service charges related to mortgage banking operations, which
consist principally of loan servicing income and borrower fees, were $70
million for the year ended December 31, 1995, compared to $10 million for the
year ended December 31, 1994. This increase is due to the inclusion in 1995
of the mortgage banking operations acquired in the FN Acquisition for an
entire year versus only the fourth quarter in 1994, as well as additional fee
revenues received as a result of the inclusion of the mortgage banking
operations acquired in the Maryland Acquisition and the LMUSA 1995 Purchase.
Fees and service charges related to retail banking operations, consisting
of depositor fees for transaction accounts, overdrafts, and miscellaneous
other fees, were $48 million for the year ended December 31, 1995 compared to
$11 million for the year ended December 31, 1994. The increase of $37 million
is due to the inclusion in 1995 of the retail banking operations acquired in
the FN Acquisition for an entire year compared to only the fourth quarter of
such operations in 1994, as well as a slight increase in such fees related to
the operations acquired in the Branch Purchases.
Management fees, principally from commercial loan servicing and asset
management services provided for third-party investors, totalled $15 million
for the year ended December 31, 1995, an increase
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of $2 million over 1994. This $2 million increase is the net effect of a $3.8
million increase in the revenues from the asset servicing agreements entered
into with Granite in conjunction with the FN Acquisition, offset by decreases
in disposition and other third-party fees received by FGB Realty Advisors,
Inc. ("FGB Realty"), principally due to the expiration of certain government
contracts, totalling $1.8 million.
Other noninterest income was $18 million for the year ended December 31,
1995, an increase of $10.4 million from the year ended December 31, 1994. The
increase is attributed to an increase of $3.4 million in dividends on FHLB
stock, $1.7 million in fees earned on check disbursement products, $1.1
million in early withdrawal penalties on deposits, and $4.2 million in
miscellaneous other income. The increases are attributed to the inclusion in
1995 of the operations acquired in the FN Acquisition for a full year
compared to the inclusion of the operations acquired in the FN Acquisition
for only the fourth quarter of 1994.
Noninterest Expense. Total noninterest expense was $333 million for the
year ended December 31, 1995, an increase of $237 million from the year ended
December 31, 1994. All categories of noninterest expense increased, primarily
due to the inclusion in 1995 of expenses related to the operations acquired
in the FN Acquisition for an entire year compared to including such expenses
for only the fourth quarter in 1994. In addition, the year ended December 31,
1995 includes charges totalling $13 million related to accrued termination
and facilities costs for specific cost reduction actions taken by the Bank
during the year.
Total compensation and employee benefits expense was $154 million for the
year ended December 31, 1995, an increase of $105 million from the year ended
December 31, 1994. The increase is primarily due to the inclusion in 1995 of
a full year of such charges related to the operations acquired in the FN
Acquisition compared to only the fourth quarter of such expenses in 1994. In
addition, 1995 includes expenses totalling $7 million related to employee
severance and termination costs for the relocation of the Bank's mortgage
loan servicing operations to Maryland, the closure of the Bank's retail
mortgage loan production offices, and a bank-wide cost reduction project.
Occupancy and equipment expense was $50 million for the year ended
December 31, 1995, an increase of $38 million from the year ended December
31, 1994. The increase is primarily due to the inclusion in 1995 of a full
year of such charges related to the operations acquired in the FN Acquisition
compared to only the fourth quarter of such expenses in 1994. In addition,
1995 includes expenses totalling $6 million related to space reductions and
lease termination charges for the relocation of the Bank's mortgage loan
servicing operations to Maryland, the closure of the Bank's retail mortgage
loan production offices, a bank-wide cost reduction project, and retail
branch consolidations due to duplicate facilities resulting from the Branch
Purchases.
Data processing expense increased to $10 million for the year ended
December 31, 1995 from $3 million for the same period in 1994. The increase
is primarily due to the inclusion in 1995 of a full year of such charges
related to the operations acquired in the FN Acquisition compared to only the
fourth quarter of such charges in 1994.
SAIF deposit insurance premiums increased to $22 million in 1995 compared
to $7 million for the year ended December 31, 1994. The increase is primarily
due to the inclusion in 1995 of a full year of such charges related to the
operations acquired in the FN Acquisition compared to only the fourth quarter
of such charges in 1994.
Marketing expense was $11 million for the year ended December 31, 1995, an
increase of $8 million from the year ended December 31, 1994. The increase is
primarily due to the inclusion in 1995 of a full year of such charges related
to the operations acquired in the FN Acquisition compared to only the fourth
quarter of such charges in 1994.
Loan expense was $12 million for the year ended December 31, 1995, an
increase of $11 million from the year ended December 31, 1994. The increase
is due to the inclusion in 1995 of a full year of the mortgage banking
operations acquired in the FN Acquisition compared to only the fourth quarter
in 1994, as well as increased expenses related to operations acquired in the
Maryland Acquisition and the LMUSA 1995 Purchase.
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Other noninterest expense was $73 million for the year ended December 31,
1995, an increase of $52 million from the year ended December 31, 1994,
principally due to increased telecommunications, postage, office supplies,
travel and professional fees expenses, all of which are attributed primarily
to the inclusion in 1995 of a full year of the operations acquired in the FN
Acquisition compared to only the fourth quarter in 1994. The Branch
Purchases, Maryland Acquisition and LMUSA 1995 Purchase also contributed to
these increases in these expenses.
Provision for Income Taxes. During the years ended December 31, 1995 and
1994, the Issuer recorded income tax (benefit) expense of $(57.2) million and
$2.6 million, respectively. The net benefit in 1995 is largely the result of
the recognition of a deferred tax benefit of $69 million. Included in tax
expense for the year ended December 31, 1995 is the reversal of 1993 and 1994
overaccruals of federal taxes totalling $1.7 million. The Issuer's effective
federal tax rates were (56)% and 0% during the years ended December 31, 1995
and 1994, respectively, while its statutory federal tax rate was 35% during
both periods. The difference between effective and statutory rates was
primarily the result of the utilization of net operating loss carryforwards
and, in 1995, the recognition of a deferred tax benefit of $69 million. The
Issuer's effective state tax rates were 9% and 8% for the years ended
December 31, 1995 and 1994, respectively.
Extraordinary Item. During the year ended December 31, 1995, the Issuer
had a gain of $2.0 million on the early extinguishment of $250 million in
FHLB advances, net of income taxes. During the year ended December 31, 1994,
the Issuer had a gain of $1.4 million on the early extinguishment of $95
million in FHLB advances, net of income taxes.
Minority Interest--First Nationwide Bank Preferred Stock Dividends.
Dividends on the Bank Preferred Stock totalling $34.6 million were declared
and paid during the year ended December 31, 1995.
Year Ended December 31, 1994 versus Year Ended December 31, 1993
Net Income. The Issuer reported net income for 1994 of $31 million
compared with net income of $144 million for 1993. Net income for 1994
includes $1.4 million, net of tax effect, in extraordinary gain from the
early extinguishment of FHLB advances. Net income for 1993 includes a pre-tax
gain of $141 million from the First Gibraltar Texas Sale.
The Issuer reported income before income taxes and extraordinary item of
$32 million in 1994 compared with pre-tax income of $147 million in 1993.
Pre-tax income was reduced by provision for income taxes of $2.6 million and
$2.5 million in 1994 and 1993, respectively.
Net interest income was $93 million for the year ended December 31, 1994,
compared with $20 million for 1993, an increase of $73 million. The
interest-bearing assets and liabilities acquired in the FN Acquisition
contributed $83 million of net interest income in 1994, and the Senior Notes
issued by the Issuer in 1994 contributed $6 million of interest expense in
1994.
Interest Income. Total interest income was $293 million for the year ended
December 31, 1994, an increase of $198 million from the year ended December
31, 1993. The interest-bearing assets acquired in the FN Acquisition resulted
in total interest-earning assets for 1994 averaging $4.3 billion, compared to
$1.8 billion for 1993 and contributed $245 million of total interest income
in 1994. The assets sold in the First Gibraltar Texas Sale contributed $26
million in total interest income in 1993. In addition, yields on
mortgage-backed securities, securities to be held to maturity and all
interest-earning assets during 1994 increased 1.01%, 1.52% and 1.43%,
respectively, from the yields on mortgage-backed securities, securities to be
held to maturity and all interest-earning assets during 1993, principally due
to increases in overall market interest rates and the FN Acquisition.
The Issuer earned $212 million of interest income on loans receivable for
the year ended December 31, 1994, an increase of $196 million from the year
ended December 31, 1993. The loans acquired in the FN Acquisition contributed
$211 million of interest income in 1994, and resulted in an increase in the
average balance of loans receivable to $2.9 billion from $124 million for the
years ended December 31,
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1994 and 1993, respectively. The weighted average yield on real estate loans
decreased to 7.27% for 1994 from 12.67% during 1993, primarily due to the
absorption of the smaller, but higher-yielding 1993 portfolio balance into
the larger, market rate sensitive portfolio acquired in the FN Acquisition.
Interest income on mortgage-backed securities was $43 million for the year
ended December 31, 1994, an increase of $37 million from the year ended
December 31, 1993. The mortgage-backed securities acquired in the FN
Acquisition contributed $29 million of the increase and resulted in the
average portfolio balances increasing from $120 million to $711 million
during the years ended December 31, 1993 and 1994, respectively. The weighted
average yield on mortgage-backed securities increased to 6.05% for 1994 from
5.04% for 1993, primarily due to addition of higher-yielding securities from
the FN Acquisition and the subsequent upward rate adjustments of
adjustable-rate mortgage-backed securities related to an overall increase in
market interest rates.
The interest income from Covered Assets declined $19 million, to $30
million for the year ended December 31, 1994. This decline is due to a
reduction in the volume of Covered Assets due to sales, repayments and other
dispositions net of a slight increase in the effective rate earned on such
Covered Assets. The higher rate is due to the net effect of the increase in
TCOF between the two periods due to generally increasing interest rates
offset by the reduction in the applicable margin over the TCOF prescribed in
the Assistance Agreement.
Interest income from securities to be held to maturity and
interest-bearing deposits in other banks was $7 million for the year ended
December 31, 1994, a decrease of $17 million from the year ended December 31,
1993. The average portfolio balances during the years ended December 31, 1994
and 1993 decreased to $138 million from $710 million, respectively, due to
restructuring of the balance sheet as a result of the FN Acquisition. The
weighted average yield on these assets increased to 4.95% for 1994 from 3.43%
for 1993, primarily due to the increase in market interest rates.
Interest Expense. Total interest expense was $200 million for the year
ended December 31, 1994, an increase of $125 million from the year ended
December 31, 1993. The increase is the result of additional interest-bearing
liabilities from the FN Acquisition, the issuance of the Senior Notes, and
the increase in overall market interest rates.
Interest expense on deposits, including Brokered Deposits, was $101
million for the year ended December 31, 1994, an increase of $46 million from
the year ended December 31, 1993. The deposits of approximately $10 billion
acquired in the FN Acquisition, net of $1.2 billion in deposits sold in the
Illinois Sale, contributed an additional $85 million in interest expense in
1994 and resulted in an increase in the average balance of deposits
outstanding from $1.2 billion to $2.6 billion for the years ended December
31, 1993 and 1994, respectively. The deposit liabilities included in the
First Gibraltar Texas Sale contributed $26 million of interest expense in
1993. The overall weighted average cost of deposits decreased from 4.59% for
1993 to 3.88% for 1994, due principally to the larger volume of lower rate
transaction accounts acquired in the FN Acquisition. The FN Acquisition
decreased the Bank's reliance on Brokered Deposits as a source of funds.
Interest expense on securities sold under agreements to repurchase and
borrowings totalled $99 million for the year ended December 31, 1994, an
increase of $79 million from the year ended December 31, 1993. Approximately
$55 million of the increase is attributed to liabilities acquired in the FN
Acquisition, with an additional $18 million attributable to the FHLB advances
which replaced the deposits sold in the Illinois Sale. In addition, the
interest expense related to the Senior Notes totalled $6 million in 1994. The
average balance of securities sold under agreements to repurchase and
borrowings outstanding for the years ended December 31, 1994 and 1993 was
$1.5 billion and $394 million, respectively. The weighted average interest
rate on these instruments increased to 6.46% in 1994 from 4.91% for 1993,
primarily due to the impact of increases in overall market interest rates
between December 1993 through the date of the FN Acquisition and continued
increasing rates thereafter through year end 1994, as well as the issuance of
the Senior Notes.
Net Interest Income. Net interest income before provision for loan losses
was $93 million for the year ended December 31, 1994, an increase of $73
million from the year ended December 31, 1993. The interest rate spread
increased to 2.02% in 1994 from .72% in 1993.
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Noninterest Income. Total noninterest income, consisting primarily of
mortgage banking, customer banking and management fee income, was $41 million
for the year ended December 31, 1994, a decrease of $150 million from the
year ended December 31, 1993. Noninterest income in 1993 included gains of
$165 million from the sales of branches and loans related to the First
Gibraltar Texas Sale. After adjusting for these gains, other noninterest
income increased $16 million from the year ended December 31, 1993 to
December 31, 1994, which represents the net of $25 million additional income
related to operations acquired in the FN Acquisition offset in part by $9
million of income in 1993 related to the operations included in the First
Gibraltar Texas Sale.
Fees and service charges related to mortgage banking operations,
principally loan servicing income and borrower fees, were $10 million for the
year ended December 31, 1994, compared to $1 million for the year ended
December 31, 1993. This increase is due to the addition of the mortgage
banking operations from the FN Acquisition, offset in part by the
distribution of FGMH to First Gibraltar Holdings (the then immediate parent
of the Bank) in the first quarter of 1993. During 1994, the Issuer sold $47
million in principally fixed rate single-family mortgage loans originated as
part of the Issuer's ongoing mortgage banking operations.
Fees and service charges related to retail banking operations, consisting
of depositor fees for transaction accounts, overdrafts, and miscellaneous
other fees, were $11 million for the year ended December 31, 1994 compared to
$3 million for the year ended December 31, 1993. The increase of $8 million
is composed of $11 million in income related to retail banking operations
acquired in the FN Acquisition offset in part by $3 million received in 1993
related to the retail banking operations sold in the First Gibraltar Texas
Sale.
Management fees, which were recorded as other noninterest income, totalled
$13 million for the year ended December 31, 1994, an increase of $5 million
over 1993. This increase is due to a $3.5 million increase in disposition and
other fees for assets serviced by FGB Realty and $1.5 million in fees related
to the shared services and asset servicing contracts with Granite entered
into in conjunction with the FN Acquisition.
Noninterest Expense. Total noninterest expense was $96 million for the
year ended December 31, 1994, an increase of $33 million from the year ended
December 31, 1993, principally due to increased compensation, occupancy and
SAIF deposit insurance premiums, primarily related to the FN Acquisition.
Total compensation and employee benefits expense was $49 million for the
year ended December 31, 1994, an increase of $24 million from the year ended
December 31, 1993. This increase of $24 million is composed principally of a
$32 million increase attributable to the FN Acquisition, offset in part by $5
million of the expense in 1993 related primarily to operations sold in the
First Gibraltar Texas Sale.
Occupancy and equipment expense was $12 million for the year ended
December 31, 1994, an increase of $7 million from the year ended December 31,
1993. This increase of $7 million is comprised principally of $9 million due
to the FN Acquisition, offset in part by $2 million of the expense
represented by operations sold in the First Gibraltar Texas Sale.
Extraordinary Item. The Issuer had a net gain on the early extinguishment
of FHLB advances of $1.4 million during the year ended December 31, 1994.
Such gain resulted from the prepayment of $95.2 million in FHLB advances.
PROVISION FOR FEDERAL AND STATE INCOME TAXES
During the years ended December 31, 1995, 1994 and 1993, the Issuer
recorded income tax (benefit) expense, excluding the tax effects associated
with extraordinary items in 1995 and 1994, of $(57.2) million, $2.6 million
and $2.5 million respectively. The Issuer's effective tax rates were (47)%,
8% and 2% in 1995, 1994 and 1993, respectively. The Issuer's statutory
federal tax rate was 35% in each of 1995, 1994 and 1993. The difference
between effective and statutory rates was primarily the result of offsetting
certain deductions and losses with the receipt of non-taxable FSLIC/RF
assistance payments and, in 1995, the
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recognition of a deferred tax benefit totalling $69 million. The non-taxable
portions of the FSLIC/RF assistance payments decreased to $5 million in 1995
from $9 million in 1994. During 1995, the Issuer used the experience method
for purposes of calculating its bad debt reserve.
The Bank, the Issuer and Mafco Holdings are parties to the Tax Sharing
Agreement effective as of January 1, 1994, pursuant to which (i) the Bank
will pay to the Issuer amounts equal to the taxes that the Bank would be
required to pay if it were to file a return separately from the Mafco Group
and (ii) the Issuer will pay to Mafco Holdings amounts equal to the taxes
that the Issuer would be required to pay if it were to file a consolidated
return on behalf of itself and the Bank separately from the Mafco Group. The
Tax Sharing Agreement allows the Bank to take into account, in determining
its liability to the Issuer, any net operating loss carryovers that it would
have been entitled to utilize if it had filed separate returns for each year
since the formation of the Bank. The Tax Sharing Agreement also allows the
Issuer to take into account, in determining its liability to Mafco Holdings,
any net operating losses that it would have been entitled to utilize if it
had filed a consolidated return on behalf of itself and the Bank for each
year since the formation of the Bank. Accordingly, pursuant to the Tax
Sharing Agreement, the benefits of any net operating losses generated by the
Bank since its formation are retained by the Bank and the Issuer.
The Bank has generated significant federal income tax net operating losses
since it was organized in December 1988. This is due, in part, to the fact
that under applicable federal income tax law, the financial assistance
received by the Bank pursuant to the Assistance Agreement was excluded from
the taxable income of the Bank. In addition to such tax-free financial
assistance, the Bank has been entitled to its normal operating deductions,
including interest expense and certain losses relating to its loan portfolio.
As a result, the Bank generated significant net operating losses for federal
income tax purposes even though its operations were profitable. Furthermore,
under the reorganization provisions of the Code, the Bank succeeded to
certain net operating loss carryovers of the Texas Closed Banks.
At December 31, 1995, if the Issuer had filed a consolidated tax return on
behalf of itself (as common parent) and the Bank for each year since the
formation of the Bank, it would have had approximately $2.6 billion of
regular tax net operating losses and approximately $992 million of AMT net
operating losses, both of which the Issuer would have been entitled to
utilize. A portion of such losses, to the extent not previously used to
offset income, would expire in the year 2002 and thereafter and would fully
expire in 2007. Under applicable tax law, only 90% of a corporation's
alternative minimum taxable income may be offset by carryovers from other
years. Thus, 10% of the alternative minimum taxable income earned by the
Issuer in the current period will be subject to federal income tax at an
effective rate of 20%. For the year ended December 31, 1995 this resulted in
federal income tax benefit, including the tax effects associated with
extraordinary items, of $68.7 million. Included in federal income tax benefit
for the year ended December 31, 1995 was the recognition of a $69 million
deferred tax benefit in the fourth quarter of 1995 and an adjustment reducing
prior years' tax expense by $1.7 million. It is not anticipated that the
Issuer's liability for alternative minimum tax under the Tax Sharing
Agreement will be significant. Accordingly, it is expected that under the Tax
Sharing Agreement, the Bank and the Issuer will be able to eliminate a
significant portion of the amounts that they otherwise would be required to
pay to the Issuer and Mafco Holdings, respectively, in respect of federal
income tax and, accordingly, it is not expected that the Bank or the Issuer
will record significant amounts of federal income tax expense as members of
the Mafco Group. Payments made by the Issuer under the Tax Sharing Agreement
with the Mafco Group during the year ended December 31, 1995 totalled $3.1
million. There were no such payments in 1994. Such payments may increase
significantly at such time as the net operating losses described above are
either used in full to offset income or expire.
TAX EFFECTS OF DIVIDEND PAYMENTS BY THE BANK
Dividend distributions made to the Issuer, as the sole owner of the Bank's
common stock, and to holders of the Bank Preferred Stock, in each case in
excess of the Bank's accumulated earnings and profits, as well as any
distributions in dissolution or in redemption or liquidation of stock, may
cause the Bank to recognize a portion of its tax bad debt reserves as income
and, accordingly, could cause the Bank to make payments to the Issuer under
the Tax Sharing Agreement. As a result, the Issuer may be required to make
payments to Mafco Holdings under the Tax Sharing Agreement if the Issuer has
insufficient
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expenses and losses to offset such income. The Bank does not expect to
generate substantial amounts of federal taxable income (after taking into
account its net operation loss carryovers) from any recapture of its bad debt
reserve. Accordingly, the recapture of its bad debt reserve as a result of
distributions to stockholders, or of the redemption of stock, would not be
expected to have a material adverse effect on the Bank.
TAXATION OF THE BANK
Under current law, the Bank qualifies as a domestic building and loan
association for federal income tax purposes. Accordingly, the Bank is
entitled to take its bad debts into account using the reserve method of
accounting under Section 593 of the Code. The Bank determines the amount of
the appropriate addition to its bad debt reserves based on the experience
method of accounting of Section 593(b)(3), which is described in Section
585(b)(2) of the Code, rather than on the percentage of taxable income method
described in Section 593(b)(2) of the Code.
Each of the Senate and House of Representatives has passed a bill which
includes a provision that, if enacted, would repeal Section 593 of the Code.
In addition, the President has proposed tax legislation that also includes a
provision repealing Section 593 of the Code which is substantially similar to
the provision passed by Congress. If tax legislation is ultimately enacted
that includes a repeal of Section 593 of the Code, the reserve method of
accounting for bad debts would no longer be available to the Bank. Rather,
the Bank generally would be required to take its bad debts into account using
the specific charge-off method. Pursuant to the specific charge-off method,
the Bank would be entitled to take its bad debts into account in the taxable
year during which such debts become wholly or partially worthless. The repeal
of Section 593 of the Code also may require a domestic building and loan
association, such as the Bank, to recapture a certain portion of its bad debt
reserve into income under certain circumstances, and, accordingly, could
cause the Bank to make payments to the Issuer under the Tax Sharing
Agreement. As a result, the Issuer may be required to make payments to Mafco
Holdings under the Tax Sharing Agreement if the Issuer has insufficient
expenses and losses to offset such income. As of December 31, 1995, the Bank
had tax bad debt reserves totalling $187 million, all of which had been
provided for in deferred tax liabilities. The Bank does not expect to
generate substantial amounts of federal taxable income (after taking into
account its net operating loss carryovers) from any recapture of the Bank's
bad debt reserve. Accordingly, the repeal of the reserve method of accounting
for bad debts, if enacted, would not be expected to have a material adverse
effect on the Bank.
PROVISION FOR LOAN LOSSES
The adequacy of the allowance for loan losses is periodically evaluated by
management in order to maintain the allowance at a level that is sufficient
to absorb expected loan losses. The Issuer charges current earnings with a
provision for estimated credit losses on loans receivable. The provision
considers both specifically identified problem loans as well as credit risks
not specifically identified in the loan portfolio. The Issuer established
provisions for loan losses of $37 million, $6 million and $1 million for the
years ended December 31, 1995, 1994 and 1993, respectively. The allowance for
loan losses is increased by provisions for loan losses and decreased by
charge-offs (net of recoveries). See "--General-- Accounting Changes." The
increase in the provision for losses in 1995 over 1994 is due to the
increased loan production activity (primarily single-family residential) and
loans acquired through acquisitions in 1995 compared to 1994.
A significant portion of the Issuer's loans are secured by real estate
located within California. Accordingly, the ultimate collectibility of those
loans is susceptible to changes in the economic conditions in such region.
Management's periodic evaluation of the adequacy of the allowance is based on
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value
of any underlying collateral, current prospective economic conditions, and
the remaining available balance under the Put Agreement. Real estate values
could also be affected by earthquakes.
55
<PAGE>
Although management believes that its present allowance for loan losses is
adequate, it will continue to review its loan portfolio to determine the
extent to which any changes in economic conditions or loss experience may
require further provisions in the future.
ASSET AND LIABILITY MANAGEMENT
Financial institutions are subject to interest rate risk to the degree
that their interest-bearing liabilities, consisting principally of deposits,
securities sold under agreements to repurchase and FHLB advances, mature or
reprice more or less frequently, or on a different basis, than their
interest-earning assets. A key element of banking is the monitoring and
management of liquidity risk and interest rate risk. The process of planning
and controlling asset and liability mixes, volumes and maturities to
influence the net interest spread is referred to as asset and liability
management. The objective of the Issuer's asset and liability management is
to maximize the net interest yield within the constraints imposed by prudent
lending and investing practices, liquidity needs and capital planning.
The Issuer, through the Bank, actively pursues investment and funding
strategies to minimize the sensitivity of its earnings to interest rate
fluctuations. The Bank measures the interest rate sensitivity of the balance
sheet through gap and duration analysis, as well as net interest income and
market value simulation, and, after taking into consideration both the
variability of rates and the maturities of various instruments, evaluates
strategies which may reduce the sensitivity of its earnings to interest rate
and market value fluctuations. An important decision is the selection of
interest-bearing liabilities which best match interest rate changes in the
loan and investment portfolios. In order to reduce interest rate risk by
increasing the percentage of interest sensitive assets, First Nationwide has
continued its emphasis on the origination of adjustable rate mortgage ("ARM")
products for its portfolio. Where possible, the Bank seeks to originate real
estate loans that reprice frequently and that on the whole adjust in
accordance with the repricing of its liabilities. In general, most of the
fixed rate real estate loans originated have been sold in the secondary
market and substantially all of the ARM loans ("ARMs") originated prior to
September 30, 1995 have been retained for the investment portfolio.
Subsequent to September 30, 1995, however, all of the ARMs originated were
sold in the secondary market in anticipation of the SFFed Acquisition. At
December 31, 1995, approximately 83% of the Issuer's real estate loan
portfolio consisted of ARMs.
ARMs have from time to time been offered with low initial interest rates
as marketing inducements. In addition, most ARMs are also subject to periodic
interest rate adjustment caps or floors. In a period of rising interest
rates, ARMs could reach a periodic adjustment cap while still at a rate
significantly below their contractual margin over existing market rates.
Since repricing liabilities are typically not subject to such interest rate
adjustment constraints, the Issuer's net interest margin would most likely be
negatively impacted in this situation. Certain ARMs now offered by First
Nationwide have a fixed monthly payment for a given period, with any changes
as a result of market interest rates reflected in the unpaid principal
balance through negative amortization. From the lender's perspective, these
loans respond most quickly to rate changes because interest accruals
immediately reflect the loans as though they were fully indexed. In general,
the closer the interest rate on a portfolio of ARMs is to the ultimate
contractual margin over market rates, the more sensitive the portfolio yield
is to changes in market interest rates.
As a result of the FN Acquisition, the Bank acquired the rights and
assumed the obligations of Old FNB under certain interest rate swap
agreements. Under the terms of these agreements, the Bank pays the variable
rate based on LIBOR and receives fixed rates. During 1995 and 1994, the
Issuer's net interest margin decreased by $12.9 million and $4.2 million,
respectively, as a result of these interest rate swap agreements, largely due
to the amortization of the premium assigned to these agreements in the FN
Acquisition.
One of the most important sources of a financial institution's net income
is net interest income which is the difference between the combined yield
earned on interest-earning assets and the combined rate paid on
interest-bearing liabilities. Net interest income is also dependent on the
relative balances of interest-earning assets and interest-bearing
liabilities.
A traditional measure of interest-rate risk within the savings industry is
the interest rate sensitivity gap, which is the sum of all interest-earning
assets minus the sum of all interest-bearing liabilities to be
56
<PAGE>
repriced within the same period. A gap is considered positive when the amount
of interest rate sensitive assets exceeds interest rate sensitive
liabilities, while the opposite results in a negative gap. During a period of
rising interest rates, a negative gap would tend to adversely affect net
interest income, and a positive gap would tend to result in an increase in
net interest income, while the opposite would tend to occur in a period of
falling rates.
The following table sets forth the projected maturities based upon
contractual maturities as adjusted for projected prepayments and "repricing
mechanisms" (provisions for changes in the interest rates of assets and
liabilities), and the impact of interest rate swap agreements as of December
31, 1995. Prepayment rates are assumed in each period on substantially all of
the Issuer's loan portfolio based upon expected loan prepayments. Repricing
mechanisms on the Issuer's assets are subject to limitations such as caps on
the amount that interest rates and payments on its loans may adjust and,
accordingly, such assets may not respond in the same manner or to the same
extent to changes in interest rates as the Issuer's liabilities. In addition,
the interest rate sensitivity of the Issuer's assets and liabilities
illustrated in the table would vary substantially if different assumptions
were used or if actual experience differed from the assumptions set forth.
The Issuer's estimated interest rate sensitivity gap at December 31, 1995 is
as follows:
<TABLE>
<CAPTION>
MATURITY/RATE SENSITIVITY
------------------------------------------
WITHIN 1 1-5 OVER 5
YEAR YEARS YEARS TOTAL
--------- ---------- -------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Securities held to maturity (1)(2) ................. $ 159 $ -- $ -- $ 159
Mortgage-backed securities held to maturity (1) ... 1,522 1 2 1,525
Loans and securities held for sale, net (3) ....... 3,029 -- -- 3,029
Loans receivable, net (1)(4) ....................... 7,675 556 639 8,870
Covered Assets, net (5) ............................ 39 -- -- 39
Investment in FHLB ................................. 110 -- -- 110
--------- ---------- -------- ---------
Total interest-earning assets .................... 12,534 557 641 13,732
Noninterest-earning assets ......................... -- -- 914 914
--------- ---------- -------- ---------
$12,534 $ 557 $ 1,555 $14,646
========= ========== ======== =========
INTEREST-BEARING LIABILITIES
Deposits (6) ....................................... $ 8,436 $ 1,759 $ 47 $10,242
Securities sold under agreements to repurchase (1) 719 250 -- 969
FHLB advances (1) .................................. 1,712 325 2 2,039
Other borrowings (1) ............................... 57 3 290 350
--------- ---------- -------- ---------
Total interest-bearing liabilities ............... 10,924 2,337 339 13,600
Noninterest-bearing liabilities .................... -- -- 283 283
Minority interest .................................. -- -- 301 301
Stockholders' equity ............................... -- -- 462 462
--------- ---------- -------- ---------
$10,924 $ 2,337 $ 1,385 $14,646
========= ========== ======== =========
Gap before interest rate swap agreements .......... $ 1,610 $(1,780) $ 302 $ 132
Interest rate swap agreements (7) .................. (400) 400 -- 0
Gap adjusted for interest rate swap agreements .... 1,210 (1,380) 302 132
Cumulative gap ..................................... 1,210 (170) 132 132
Gap as a percentage of total assets ................ 8.3% (9.4%) 2.1% 1.0%
Cumulative gap as a percentage of total assets .... 8.3% (1.1%) 1.0% 1.0%
</TABLE>
- ------------
(1) Based upon: (a) contractual maturity, (b) instrument repricing date, if
applicable, and (c) projected repayments and prepayments of principal, if
applicable. Prepayments were estimated generally by using the prepayment
rates forecast by various large brokerage firms as of December 31, 1995.
The actual maturity and rate sensitivity of these assets could vary
substantially if future prepayments differ from the Issuer's prepayment
estimates.
(2) Consists of $32 million of interest-bearing deposits in other banks, $125
million of short-term investment securities and $2 million of securities
held to maturity.
(3) As loans held and securities available for sale may be sold within one
year, they are considered to be maturing within one year.
(4) Excludes allowance for loan losses of $210.5 million and nonaccrual loans
of $171.5 million.
57
<PAGE>
(5) Covered Assets generally reprice quarterly according to the change in TCOF,
the composite cost of funds for thrift institutions in Texas. Because TCOF
is generally reported on a quarterly basis, the Covered Assets are included
within the one year time frame in this table.
(6) Fixed rate deposits and deposits with a fixed pricing interval are
reflected as maturing in the year of contractual maturity or first repricing
date. Money market deposit accounts, demand deposit accounts and passbook
accounts are reflected as maturing within one year.
(7) Agreements with a notional amount of $500 million and $250 million maturing
in April and September 1996, respectively, have no impact within the time
periods presented.
At December 31, 1995, interest-earning assets of the Issuer exceeded
interest-bearing liabilities by approximately $132 million.
The maturity/rate sensitivity analysis is a static view of the balance
sheet with assets and liabilities grouped into certain defined time periods,
and thus only partially depicts the dynamics of the Issuer's sensitivity to
interest rate changes. Being at a point in time, this analysis may not fully
describe the complexity of relationships between product features and
pricing, market rates and future management of the balance sheet mix. The
Issuer utilizes computer modeling, under various interest rate scenarios, to
provide a dynamic view of the effects of the changes in rates, spreads, and
yield curve shifts on net interest income.
The Issuer's risk management policies are established by the
Asset/Liability Management Committee ("ALCO") of the Bank. ALCO meets monthly
to formulate the Bank's investment and risk management strategies. The basic
responsibilities of ALCO include management of net interest income and market
value of portfolio equity to measure the stability of earnings, management of
liquidity to provide adequate funding, and the establishment of asset product
priorities by formulating performance evaluation criteria, risk evaluation
techniques and a system to standardize the analysis and reporting of
originations, competitive trends, profitability and risk. On a quarterly
basis, the Board of Directors of the Bank is apprised of ALCO strategies
adopted and their impact on operations. At least annually, the Board of
Directors of the Bank reviews the Bank's interest rate risk management policy
statements.
On November 15, 1995, the FASB issued the Special Report. On December 29,
1995, the Issuer reclassified substantially all of its securities and
mortgage-backed securities from held to maturity to available for sale. The
impact on the gap schedule of reclassifying securities from the
held-to-maturity portfolio to the available-for-sale portfolio is to shorten
the maturity and interest rate sensitivity of such assets. See
"--General--Accounting Changes."
LIQUIDITY
The standard measure of liquidity in the savings industry is the ratio of
cash and short-term U.S. government and other specified securities to
deposits and borrowings due within one year. The OTS has currently
established a minimum liquidity requirement of 5.0%. The Bank's liquidity
ratio was 5.46% and 5.62% at December 31, 1995 and 1994, respectively.
A major source of the Bank's funding is expected to be its retail deposit
branch network, which management believes will be sufficient to meet its
long-term liquidity needs. The ability of First Nationwide to retain and
attract new deposits is dependent upon the variety and effectiveness of its
customer account products, customer service and convenience, and rates paid
to customers. The Bank also obtains funds from the repayment and maturities
of loans and mortgage-backed securities, and from the disposition of
primarily Covered Assets (including assistance payments from the FSLIC/RF),
while additional funds can be obtained from a variety of sources including
customer and Brokered Deposits, loan sales, securities sold under agreements
to repurchase, FHLB advances, and other secured and unsecured borrowings. It
is anticipated that FHLB advances and securities sold under agreements to
repurchase will be secondary sources of funding, and management expects there
to be adequate collateral for such funding requirements. The FN Acquisition
decreased the Bank's reliance on Brokered Deposits as a source of funds.
The Bank's primary uses of funds are the origination or purchase of loans,
the funding of the Bank's maturing certificates of deposit and demand deposit
withdrawals, and the repayment of borrowings.
58
<PAGE>
Certificates of deposit scheduled to mature during the twelve months ending
December 31, 1996 total $4.9 billion. The Bank may renew these certificates,
attract new replacement deposits, replace such funds with other borrowings,
or it may elect to shrink the balance sheet. In addition, at December 31,
1995, the Bank had FHLB advances and other borrowings of $1.5 billion
maturing within twelve months. The Bank may elect to pay off such debt or to
replace borrowings with additional FHLB advances at prevailing rates.
The Bank has entered into various contracts in connection with the Branch
Sales and the Home Federal Acquisition. The Bank currently has sufficient
borrowing capacity to fund these transactions. This additional funding may
take the form of additional borrowings under reverse repurchase agreements,
additional advances from the FHLB, or increased cash raised through the
remaining retail deposit network. The Bank expects to finance the Home
Federal Acquisition with existing cash and, if necessary, proceeds from
additional borrowings. Net cash flow from operations, together with these
additional funding sources, is expected to be adequate to maintain liquidity
above the required levels.
During 1994, First Nationwide issued 3,007,300 shares of the Bank
Preferred Stock. Cash dividends on the Bank Preferred Stock are noncumulative
and are payable at an annual rate of 11-1/2% if, when, and as declared by the
Board of Directors of the Bank. The payment of dividends by the Bank is
subject to certain federal laws applicable to savings associations. Bank
Preferred Stock dividends totalling $34.6 million were declared and paid
during 1995.
During 1995, the FSLIC/RF purchased substantially all remaining Covered
Assets at the fair market value of such assets in the FDIC Purchase. Any
losses sustained by First Nationwide from this directed purchase were
reimbursed under the Capital Loss Provision of the Assistance Agreement. See
"Business--Other Activities--The Assistance Agreement." Proceeds from this
transaction were reinvested in the normal course of business. As a result of
the FDIC Purchase, the Bank's reliance on dispositions of Covered Assets as a
source of funds has been substantially eliminated.
In the FN Acquisition, the Bank assumed $92.1 million of Old FNB's
Subordinated Debentures which have an annual interest rate of 10% and an
annual interest cost of $9.2 million. In the SFFed Acquisition, the Bank
assumed $50 million of the SFFed Notes which have an annual interest rate of
11.20% and an annual interest cost of $5.6 million.
The Issuer anticipates that cash and cash equivalents on hand, the cash
flow from assets as well as other sources of funds will provide adequate
liquidity for the Bank's operating, investing and financing needs and its
regulatory liquidity requirements in the future. In addition to cash and cash
equivalents of $312.6 million at December 31, 1995, the Bank has substantial
additional secured borrowing capacity with the FHLB and other sources.
Net cash used in operating activities for the year ended December 31, 1995
totalled $430 million, an increase of $393 million from the year ended
December 31, 1994. The increase is principally due to the increase in loans
held for sale due to the additional production capacity from the Maryland
Acquisition and the LMUSA 1995 Purchase.
Net cash used in operating activities for the year ended December 31, 1994
totalled $37.2 million, a decrease of $5.3 million from the year ended
December 31, 1993.
Net cash provided by investing activities for the year ended December 31,
1995 totalled $1.7 billion, an increase of $1.7 billion from the year ended
December 31, 1994. Cash flows provided by investing activities included $272
million from the FDIC Purchase and other dispositions of the Covered Assets,
principal payments on mortgage-backed securities totalling $571 million and
proceeds from maturities of securities of $344 million. Proceeds from sales
of loans receivable, including loans sold to Granite pursuant to the Put
Agreement of $199.5 million, totalled $431 million. Redemptions of FHLB stock
provided $26 million, and proceeds from sales of foreclosed real estate
provided $71 million. Proceeds from the Branch Purchases provided $501
million. Cash flows used in investing activities included $215 million for
the Maryland Acquisition and LMUSA 1995 Purchase, purchases of securities of
$158 million, purchases of $20 million in mortgage-backed securities, a net
increase in loans receivable of $86 million, and purchases of office premises
and equipment of $15 million.
59
<PAGE>
Net cash used in investing activities for the year ended December 31, 1994
totalled $1 million, a decrease of $3.6 billion from the year ended December
31, 1993. The decrease was due largely to the purchase of securities
totalling $3.5 billion in early 1993 from proceeds obtained from prior year
sales of loans and mortgage-backed securities in preparation for the First
Gibraltar Texas Sale. Funds used in the FN Acquisition totalled $527 million,
representing the purchase price paid at closing of $715 million, less cash
and cash equivalents acquired of $188 million. Other uses included purchases
of securities during 1994 of $158 million, purchases of $64 million in loans
and mortgage-backed securities, and a net $69 million increase in loans
receivable. Funds provided by investing activities included a $280 million
decline in Covered Assets resulting from dispositions, principal payments on
mortgage-backed securities totalling $178 million and proceeds from
maturities of securities of $109 million. Proceeds from sales of loans
receivable totalled $155 million. Proceeds from the Illinois Sale provided
$31 million, redemptions of FHLB stock provided $28 million, and proceeds
from sales of foreclosed real estate provided $26 million.
Net cash used in financing activities for the year ended December 31, 1995
totalled $1.2 billion. Principal payments on borrowings totalled $6.9
billion, and the net decrease in securities sold under agreements to
repurchase totalled $913 million. Cash flows provided by financing activities
included increases in deposits (other than the Branch Purchases) of $543
million and additional borrowings of $6.2 billion. Additionally, dividends on
and redemptions of the Issuer's class C common stock were $29 million and $61
million, respectively.
Net cash provided by financing activities for the year ended December 31,
1994 totalled $183 million. The issuance of the Bank Preferred Stock, the
Issuer's class C common stock and the Senior Notes in connection with the FN
Acquisition provided $289 million, approximately $210 million and
approximately $190 million, respectively. These funds were partially offset
by an overall net decrease in borrowings and securities sold under agreements
to repurchase of $232 million. Additionally, deposits decreased $84 million
as Brokered Deposits were allowed to mature.
The Issuer's primary source of cash to pay the interest on and principal
of the Senior Notes and the Notes is expected to be distributions from the
Bank. The annual interest on the Senior Notes is $24.5 million and the annual
interest on the Notes is $12.8 million.
The terms of the Bank Preferred Stock provide that the Bank may not
declare or pay any dividends or other distributions (other than in shares of
common stock of the Bank or other Junior Stock) with respect to any Junior
Stock or repurchase, redeem or otherwise acquire, or set apart funds for the
repurchase, redemption or other acquisition of any Junior Stock (including
the common stock held by the Issuer) through a sinking fund or otherwise,
unless and until: (i) the Bank has paid full dividends on the Bank Preferred
Stock for the four most recent dividend periods or funds have been paid over
to the dividend disbursing agent of the Bank for payment of such dividends,
and (ii) the Bank has declared a cash dividend on the Bank Preferred Stock at
the annual dividend rate for the current dividend period, and sufficient
funds have been paid over to the dividend disbursing agent of the Bank for
the payment of a cash dividend for such current dividend period. The Bank is
currently in compliance with both of such requirements.
The Issuer currently anticipates that, in order to pay the principal
amount of the Notes or the Senior Notes upon the occurrence of an Event of
Default or to redeem or repurchase the Notes or the Senior Notes upon a
Change of Control Put Event or, in the event that earnings from the Bank are
not sufficient to make distributions to the Issuer to enable it to pay the
principal amount of the Notes or the Senior Notes at maturity, the Issuer may
be required to adopt one or more alternatives, such as borrowing funds,
selling its equity securities or equity securities or assets of the Bank, or
seeking capital contributions or loans from its affiliates. None of the
affiliates of the Issuer will be required to make any capital contributions
or other payments to the Issuer with respect to the Issuer's obligations on
the Notes or the Senior Notes. There can be no assurance that any of the
foregoing actions could be effected on satisfactory terms, that any of the
foregoing actions would enable the Issuer to pay the principal amount of the
Notes or the Senior Notes or that any of such actions would be permitted by
the terms of the Indenture, the Senior Notes Indenture or any other debt
instruments of the Issuer or the Issuer's subsidiaries then in effect, by the
terms of the Bank Preferred Stock or under applicable federal thrift laws or
regulations.
60
<PAGE>
The terms of the Indenture and the Senior Notes Indenture generally permit
the Issuer to make distributions (and other Restricted Payments) of up to 75%
of the consolidated net income of the Issuer if, after giving effect to such
distribution or payment (i) the Bank is "well capitalized" under applicable
OTS regulations and (ii) the Consolidated Common Shareholders' Equity of the
Bank is at least equal to the Minimum Common Equity Amount. The Issuer is
able to loan funds to its affiliates pursuant to the Indenture and the Senior
Notes Indenture provided that the Consolidated Common Shareholders' Equity of
the Bank is at least the Minimum Common Equity Amount, and the terms of any
such loan are in writing and on terms that would be obtainable in arm's
length dealings, and in certain cases, to the additional requirement that the
loan be approved by a majority of disinterested directors. Subject to such
restrictions, such loans may consist of any and all funds available to the
Issuer whether or not such funds may be distributed (or otherwise paid as a
Restricted Payment) pursuant to the terms of the Indenture or the Senior
Notes Indenture. See "Description of the Notes--Certain Covenants."
Accordingly, there can be no assurance that, notwithstanding the receipt by
the Issuer of sufficient funds to enable it to pay the principal amount of
the Notes at maturity, the Issuer will have funds available to pay the
principal amount of the Notes at maturity or prior to maturity upon the
occurrence of an Event of Default or to redeem or repurchase the Notes upon a
Change of Control Put Event.
The terms and conditions of the Indenture and the Senior Notes Indenture
impose restrictions that affect, among other things, the ability of the
Issuer to incur debt, pay dividends or make distributions, engage in a
business other than holding the common stock of the Bank and similar banking
institutions, make acquisitions, create liens, sell assets and make certain
investments. The ability of the Issuer to comply with the foregoing
provisions can be affected by events beyond the Issuer's control. The breach
of any of these covenants could result in a default under one or more of the
debt instruments of the Issuer. In the event of a default under any
indebtedness of the Issuer or the Issuer's subsidiaries, the holders of such
indebtedness could elect to declare all amounts outstanding under their
respective debt instruments to be due and payable. Any such declaration under
a debt instrument of the Issuer or the Issuer's subsidiaries is likely to
result in an event of default under one or more of the other debt instruments
of the Issuer or the Issuer's subsidiaries. If indebtedness of the Issuer or
the Issuer's subsidiaries were to be accelerated, there could be no assurance
that the assets of the Issuer or the Issuer's subsidiaries, as the case may
be, would be sufficient to repay in full borrowings under all of such debt
instruments, including the Notes. See "Risk Factors--Indebtedness and Ability
to Pay Principal of the Notes," "Business-- Sources of Funds--Old FNB
Debentures," "Description of the Senior Notes" and "Description of the
Notes."
Any right of the Issuer and its creditors, including holders of the Notes,
to participate in the assets of any of the Issuer's subsidiaries, including
the Bank, upon any liquidation or reorganization of any such subsidiary will
be subject to the prior claims of that subsidiary's creditors, including the
Bank's depositors and trade creditors (except to the extent that the Issuer
may itself be a creditor of such subsidiary). Accordingly, the Notes will be
effectively subordinated to (i) all existing and future liabilities,
including deposits, indebtedness and trade payables, of the Issuer's
subsidiaries, including the Bank, and (ii) all preferred stock issued by the
Bank, including the Bank Preferred Stock. At December 31, 1995, after giving
effect to the SFFed Acquisition, the Branch Sales, the LMUSA 1996 Purchase
and the Offering, the outstanding interest-bearing liabilities, including
deposits, of such subsidiaries would have been approximately $17.1 billion,
the other liabilities of such subsidiaries, including trade payables and
accrued expenses, would have been approximately $488 million, and there would
have been approximately $301 million aggregate liquidation value of the Bank
Preferred Stock outstanding. In the event of the liquidation or dissolution
of the Bank, the holders of the Bank Preferred Stock will have preference
over the Issuer, as the holder of all of the common stock of the Bank, with
respect to the assets of the Bank.
IMPACT OF INFLATION AND CHANGING PRICES
The business of the Issuer is generally not affected by inflation in the
short run, but may be affected by inflation in the long run. Prevailing
interest rates have a more significant impact on the Issuer's performance
than does the general level of inflation. While interest rates may bear some
relationship to the general level of inflation (particularly in the long
run), over short periods of time interest rates may not necessarily move in
the same direction or change in the same magnitude as the general level of
inflation.
61
<PAGE>
NON-PERFORMING ASSETS AND IMPAIRED LOANS
Pursuant to SFAS No. 114, as amended by SFAS No. 118, effective January 1,
1995, loans collectively reviewed for impairment by the Issuer include all
single family loans and performing multi-family and commercial real estate
loans under $500,000, excluding loans which have entered the workout process.
The adoption of SFAS No. 114, as amended by SFAS No. 118, had no material
impact on the Issuer's consolidated financial statements as the Issuer's
existing policy of measuring loan impairment is consistent with methods
prescribed in these standards. See "--General--Accounting Changes."
The Issuer considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Issuer will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Any insignificant delay (i.e., 60 days or less) or
insignificant shortfall in amount of payments will not cause a loan to be
considered impaired. In determining impairment, the Issuer considers large
non-homogeneous loans including nonaccrual loans, troubled debt
restructurings, and performing loans which exhibit, among other
characteristics, high LTV ratios, low debt-coverage ratios, or other
indications that the borrowers are experiencing increased levels of financial
difficulty. The Issuer bases the measurement of collateral-dependent impaired
loans, which represents substantially all of the Issuer's loan portfolio, on
the fair value of the loan's collateral. The amount, if any, by which the
recorded investment of the loan exceeds the measure of the impaired loan's
value is recognized by recording a valuation allowance.
At December 31, 1995, the carrying value of loans that are considered to
be impaired under SFAS No. 114 totalled $125.4 million (of which $29.6
million were on nonaccrual status).
The following table presents the amounts, net of purchase accounting
adjustments, of the Issuer's nonaccrual loans, foreclosed real estate,
troubled debt restructurings, and impaired loans as of the dates indicated.
These categories are not mutually exclusive; certain loans are included in
more than one classification.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------------------------- ----------------------------------------
NONACCRUAL IMPAIRED RESTRUCTURED NONACCRUAL IMPAIRED RESTRUCTURED
------------ ---------- -------------- ------------ ---------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
1-4 unit residential ............................... $136 $-- $ 8 $133 $-- $ 19
5+ unit residential ................................ 23 73 147 24 -- 204
Commercial and other ............................... 9 52 79 11 -- 110
Land ............................................... -- -- -- 7 -- --
Construction ....................................... -- -- -- 2 -- --
---- ---- ---- ---- ---- ----
Total real estate ................................ 168 125 234 177 -- 333
Non-real estate ...................................... 3 -- -- 4 -- --
---- ---- ---- ---- ---- ----
Total loans ...................................... 171 $125 (a) $234 (b) 181 $-- $333 (b)
==== ==== ==== ====
Foreclosed real estate, net .......................... 49 37
---- ----
Total non-performing assets ...................... $220 $218
==== ====
</TABLE>
- ------------
(a) Includes $29.6 million of loans on nonaccrual status and $31.9 million
of loans classified as troubled debt restructurings.
(b) Includes nonaccrual loans of $1.2 million and $10 million at December
31, 1995 and 1994, respectively. At December 31, 1995, $1.1 million of
these nonaccrual, troubled debt restructurings were also considered
impaired under SFAS No. 114.
There were no accruing loans contractually past due 90 days or more at
December 31, 1995 or 1994.
The Issuer's non-performing assets, consisting of nonaccrual loans, net of
purchase accounting adjustments, and foreclosed real estate, net, increased
slightly to $220 million at December 31, 1995, compared with $218 million at
December 31, 1994. Non-performing assets as a percentage of the Issuer's
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<PAGE>
total assets increased slightly to 1.50% at December 31, 1995, from 1.49% of
total assets at December 31, 1994. During 1995, $199.5 million of assets were
sold to Granite under the Put Agreement, leaving a remaining available
balance under the Put Agreement of $112.4 million. Of the $220.1 million in
non-performing assets at December 31, 1995, approximately $13.5 million were
eligible to be sold to Granite pursuant to the Put Agreement.
The Issuer, through First Nationwide, continuously manages its credit risk
by assessing the current and estimated future performance of the real estate
markets in which it operates. The Bank continues to place a high degree of
emphasis on the management of its asset portfolio. First Nationwide has three
distinct asset management functions: performing loan asset management,
problem loan asset management and credit review. These three functions are
charged with the responsibility of reducing the risk profile within the
residential, commercial and multi-family asset portfolios by applying asset
management and risk evaluation techniques that are consistent with the Bank's
portfolio management strategy and regulatory requirements. In addition to
these asset management functions, First Nationwide has a specialized credit
risk management group that is charged with development of credit policies and
performing credit risk analyses for all asset portfolios.
The following table presents non-performing real estate assets by
geographic region of the country as of December 31, 1995:
<TABLE>
<CAPTION>
TOTAL
NONACCRUAL FORECLOSED NON-PERFORMING
REAL ESTATE REAL ESTATE, REAL ESTATE GEOGRAPHIC
LOANS, NET(2) NET(2) ASSETS CONCENTRATION
------------- -------------- -------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Region:
California .. $ 75 $35 $110 50.7%
Northeast(1) 46 11 57 26.3
Other regions 47 3 50 23.0
------------- -------------- -------------- ---------------
Total ....... $168 $49 $217 100.0%
============= ============== ============== ===============
</TABLE>
- ------------
(1) Includes Connecticut, Massachusetts, Maine, New Hampshire, New Jersey,
New York, Pennsylvania, Rhode Island and Vermont.
(2) Net of purchase accounting adjustments.
The level of non-performing assets is directly affected by economic
conditions throughout the country. The following table indicates nonaccrual
real estate loans, net of purchase accounting adjustments, by collateral type
and state concentration as of December 31, 1995:
<TABLE>
<CAPTION>
TOTAL
1-4 UNIT 5+ UNIT COMMERCIAL NONACCRUAL
RESIDENTIAL RESIDENTIAL AND OTHER REAL ESTATE % OF
------------------- ------------------- ------------------- LOANS TOTAL
STATE VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED ---------- ------
- ----------------- ---------- ------- ---------- ------- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California ....... $ 53 $ 4 $10 $ 1 $7 -- $ 75 44.64%
New York ......... 27 2 1 1 - -- 31 18.45
Ohio ............. 3 2 2 4 - -- 11 6.55
Hawaii ........... 10 1 -- -- - -- 11 6.55
New Jersey ....... 7 2 -- -- - -- 9 5.36
Illinois ......... 2 1 -- 3 1 -- 7 4.17
Florida .......... 2 3 -- -- 1 -- 6 3.57
Pennsylvania ..... 2 -- -- 1 - -- 3 1.79
Connecticut ...... 2 -- -- -- - -- 2 1.19
Massachusetts .... 1 1 -- -- - -- 2 1.19
Other states (1) . 8 3 -- -- - -- 11 6.54
---- --- --- --- -- --- ---- ------
Total ...........$117 $19 $13 $10 $9 $-- $168 100.00%
==== === === === == === ==== ======
</TABLE>
- ------------
(1) There are 27 states, Puerto Rico, and the District of Columbia, of
which no one state had nonaccrual loans in excess of 1% of the total.
63
<PAGE>
At December 31, 1995, the Issuer's largest non-performing asset was
approximately $6.3 million, and it had approximately nine non-performing
assets over $2 million in size with balances averaging approximately $3.6
million. The Issuer has approximately 1,750 non-performing assets below $2
million in size, including approximately 1,600 non-performing 1-4 unit
residential assets.
The following table indicates outstanding balances of troubled debt
restructured loans, net of purchase accounting adjustments, by collateral
type, interest rate type and state concentration as of December 31, 1995:
<TABLE>
<CAPTION>
TOTAL
1-4 UNIT 5+ UNIT COMMERCIAL TROUBLED
RESIDENTIAL RESIDENTIAL AND OTHER DEBT % OF
------------------- ------------------- ------------------- RESTRUCTURED TOTAL
STATE VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED ------------- ------
- ----------------- ---------- ------- ---------- ------- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California ........ $1 $5 $29 $ 5 $19 $23 $ 82 35.04%
New York .......... - 1 3 35 -- 22 61 26.07
New Jersey ........ - - 16 2 -- -- 18 7.69
Pennsylvania ...... - - 17 1 -- -- 18 7.69
Florida ........... - - 4 1 8 -- 13 5.56
Missouri .......... - - 1 3 5 -- 9 3.85
Georgia ........... - - -- 6 -- -- 6 2.56
Texas ............. - - 2 4 -- -- 6 2.56
Other states (1) .. - 1 4 14 1 1 21 8.98
-- -- --- --- --- --- ---- ------
Total ............. $1 $7 $76 $71 $33 $46 $234 100.00%
== == === === === === ==== ======
</TABLE>
- ------------
(1) There are 12 states of which no one state had troubled debt
restructured loans in excess of 2% of the total.
The following table indicates outstanding balances of impaired loans, net
of purchase accounting adjustments, by collateral type, interest rate type
and state concentration as of December 31, 1995:
<TABLE>
<CAPTION>
5+ UNIT COMMERCIAL
RESIDENTIAL AND OTHER TOTAL % OF
------------------- ------------------- IMPAIRED TOTAL
VARIABLE FIXED VARIABLE FIXED -------- -------
STATE (DOLLARS IN MILLIONS)
- -----------------
<S> <C> <C> <C> <C> <C> <C>
California ....... $29 $ 3 $38 $10 $ 80 64.00%
New York ......... 4 12 1 -- 17 13.60
Georgia .......... -- 6 -- -- 6 4.80
Ohio ............. 2 4 -- -- 6 4.80
Arizona .......... 1 3 -- -- 4 3.20
Illinois ......... -- 4 1 -- 5 4.00
Other states (1) 2 3 1 1 7 5.60
---------- ------- ---------- ------- ---------- --------
Total .......... $38 $35 $41 $11 $125 100.00%
========== ======= ========== ======= ========== ========
</TABLE>
- ------------
(1) There are 8 states of which no one state had impaired loans in excess
of 1.5% of the total.
A summary of the activity in the allowance for loan losses by loan type is
as follows for the years ended December 31, 1994 and 1995:
<TABLE>
<CAPTION>
5+ UNIT
RESIDENTIAL
1-4 UNIT AND COMMERCIAL CONSUMER
RESIDENTIAL REAL ESTATE AND OTHER TOTAL
------------- -------------- ----------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Balance -- December 31, 1993 ......... $ 2 $ -- $ -- $ 2
Purchases-FN Acquisition ........... 108 84 10 202
Provision for loan losses .......... 3 3 -- 6
Charge-offs ........................ (4) (4) (1) (9)
Recoveries ......................... 2 -- -- 2
------------- -------------- ----------- --------
Balance -- December 31, 1994 ......... 111 83 9 203
Provision for loan losses .......... 31 3 3 37
Charge-offs ........................ (27) (1) (5) (33)
Recoveries ......................... 1 -- 2 3
------------- -------------- ----------- --------
Balance -- December 31, 1995 ......... $ 116 $85 $ 9 $ 210
============= ============== =========== ========
Ratio of allowance for loan losses to
non-performing loans:
December 31, 1993 ................. 100.0% -- -- 18.2%
============= ============== =========== ========
December 31, 1994 ................. 83.5% 188.6% 225.0% 112.2%
============= ============== =========== ========
December 31, 1995 ................. 85.3% 261.9% 290.0% 122.7%
============= ============== =========== ========
</TABLE>
64
<PAGE>
For additional discussion on the non-performing assets of the Issuer, see
"Business--Non-performing Assets."
CAPITAL RESOURCES
OTS capital regulations require savings banks to satisfy three minimum
capital requirements: tangible capital, core capital and risk-based capital.
In general, an institution's tangible capital, which must be at least 1.5% of
adjusted total assets, is the sum of common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and minority
interest in equity accounts of fully consolidated subsidiaries, less most
intangible assets. An institution's ratio of core capital to adjusted total
assets (the "leverage capital ratio") must be at least 3%. Core capital
generally is the sum of tangible capital plus certain other qualifying
intangibles. Under the risk-based capital requirement, a savings bank must
have total capital (core capital plus supplementary capital) equal to at
least 8% of risk-weighted assets (which includes the credit risk equivalent
of certain off-balance sheet items). Supplementary capital, which may not
exceed 100% of core capital for purposes of the risk-based requirements,
includes, among other things, certain permanent capital instruments such as
qualifying cumulative perpetual preferred stock, as well as some forms of
maturing capital instruments, such as qualifying subordinated debt. These
capital requirements are applicable to the Bank but not to the Issuer. See
"Regulation-- Regulation of Federal Savings Banks--Regulatory Capital
Requirements."
At December 31, 1995, the Bank's regulatory capital levels exceeded the
minimum regulatory capital requirements, with tangible, leverage and
risk-based capital ratios of 5.84%, 5.84% and 11.34%, respectively. The
following is a reconciliation of the Bank's stockholders' equity to
regulatory capital as of December 31, 1995:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
---------- ---------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Stockholders' equity of the Bank ............................. $959,885 $959,885 $ 959,885
Unrealized holding gain on securities available for sale, net (63,512) (63,512) (63,512)
Non-qualifying loan-servicing rights ......................... (24,136) (24,136) (24,136)
Non-allowable capital:
Intangible assets .......................................... (18,606) (18,606) (18,606)
Investment in subsidiaries ................................. (307) (307) (307)
Supplemental capital:
Qualifying subordinated debt debentures .................... -- -- 89,600
General loan loss reserves ................................. -- -- 117,854
Assets required to be deducted:
Land loans with more than 80% LTV ratio .................... -- -- (2,290)
---------- ---------- ------------
Regulatory capital of the Bank ............................... 853,324 853,324 1,058,488
Minimum regulatory capital requirement ....................... 219,224 438,449 746,938
---------- ---------- ------------
Excess above minimum capital requirement ..................... $634,100 $414,875 $ 311,550
========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
TANGIBLE LEVERAGE RISK-BASED
CAPITAL CAPITAL CAPITAL
RATIO RATIO RATIO
---------- ---------- ------------
<S> <C> <C> <C>
Regulatory capital of the Bank ........... 5.84% 5.84% 11.34%
Minimum regulatory capital requirement .. 1.50 3.00 8.00
---------- ---------- ------------
Excess above minimum capital requirement 4.34% 2.84% 3.34%
========== ========== ============
</TABLE>
The amount of adjusted total assets used for the tangible and leverage
capital ratios is $14.6 billion. Risk-weighted assets used for the risk-based
capital ratio amounted to $9.3 billion.
The Bank is also subject to the provisions of the FDICIA, which, among
other things, define specific capital categories based on an institution's
capital ratios. The capital categories, in declining order, are "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Institutions
categorized as "undercapitalized" or worse are subject to certain
restrictions, including the requirement to file a capital plan with the OTS,
prohibitions on the payment of
65
<PAGE>
dividends and management fees, restrictions on executive compensation, and
increased supervisory monitoring, among other things. Other restrictions may
be imposed on the institution either by the OTS or by the FDIC, including
requirements to raise additional capital, sell assets, or sell the entire
institution. Once an institution becomes "critically undercapitalized" it is
generally placed in receivership or conservatorship within 90 days.
To be considered "well capitalized," a savings institution must generally
have a leverage capital ratio of at least 5%, a Tier 1 (core capital)
risk-based capital ratio of at least 6%, and a total risk-based capital ratio
of at least 10%. An institution is deemed to be "critically undercapitalized"
if it has a tangible equity ratio of 2% or less. At December 31, 1995, First
Nationwide's leverage capital, Tier 1 (core capital) risk-based and total
risk-based capital ratios were sufficient for it to be considered "well
capitalized":
<TABLE>
<CAPTION>
RISK-BASED
-------------------------
LEVERAGE CAPITAL TIER 1 TOTAL CAPITAL
---------------- -------- ---------------
<S> <C> <C> <C>
Regulatory capital of the Bank ..... 5.84% 9.14% 11.34%
Well capitalized ratio .............. 5.00 6.00 10.00
---------------- -------- ---------------
Excess above well capitalized ratio .84% 3.14% 1.34%
================ ======== ===============
</TABLE>
The Issuer expects that the Bank will remain a "well capitalized"
institution after consummation of the Branch Sales, the SFFed Acquisition,
the LMUSA 1996 Purchase and the Home Federal Acquisition. In addition, the
Capital Contribution of approximately $133 million on February 1, 1996
further strengthened the Bank's regulatory capital ratios.
OTS capital regulations allow a savings bank to include a net deferred tax
asset under SFAS No. 109 in regulatory capital, subject to certain
limitations. To the extent that the realization of a deferred tax asset
depends on a savings bank's future taxable income, such deferred tax asset is
limited for regulatory capital purposes to the lesser of the amount that can
be realized within one year or 10 percent of core capital. As of December 31,
1994, the Bank recorded a valuation adjustment for 100% of the Bank's net
deferred tax asset because the Bank believed at that time, it was not more
likely than not that such deferred tax assets would be realized.
Based on a favorable earnings trend since the consummation of the FN
Acquisition and future earnings expectations, management changed its judgment
about the realizability of the Bank's net deferred tax assets and recognized
a deferred tax benefit of $69 million in the fourth quarter of 1995. The net
tax benefit of $69 million has been determined based upon the amount of
taxable income that may be realized within one year. This amount does not
exceed 10 percent of core capital and therefore is allowed without limitation
under OTS capital regulations.
Congress has passed budget reconciliation legislation that, if enacted,
would impose a one-time assessment on all SAIF-insured deposits held as of
March 31, 1995, in order to capitalize the SAIF to the required designated
reserve ratio of 1.25% of insured deposits. The President has vetoed this
budget reconciliation bill. Such veto, however, was based on issues unrelated
to the provisions dealing with capitalization of the SAIF. The FDIC, which
would establish the assessment rate, has estimated the rate needed to
capitalize the SAIF to be in the range of 85 cents to 90 cents per $100 of
domestic deposits. If the assessment is enacted into law, and assessed at the
rate estimated by the FDIC, after giving effect to the SFFed Acquisition, the
Branch Sales, the Home Federal Acquisition and the Branch Purchases, the
effect on the Bank would be a pre-tax charge in the range of $75 to $80
million ($68 to $72 million on an after-tax basis). Such an assessment would
not be expected to cause the Bank to fail to meet the capital requirements of
a "well capitalized" institution based upon the Bank's regulatory capital and
asset levels as of December 31, 1995. Upon the SAIF reaching the required
reserve ratio, management expects that the Bank's SAIF deposit premium
assessments would decrease substantially from the Bank's current rate of 23
cents. The Issuer is unable to predict whether this, or similar, legislation
will be enacted.
Because the SAIF has not reached its required designated reserve ratio,
savings associations like the Bank insured by SAIF pay deposit insurance
premiums that are higher (by at least 23 cents per $100 of
66
<PAGE>
deposits) than premiums paid by comparable banks insured by the Bank
Insurance Fund ("BIF"), which has adequate reserves. See
"Regulation--Regulation of Federal Savings Banks--FDIC Assessments." This
disparity in deposit insurance costs gives SAIF-insured institutions
incentives to attempt to leave the SAIF and seek BIF insurance, and adversely
affects returns on capital of SAIF members as compared with
similarly-situated, BIF-insured competitors.
In addition to Congressional proposals to capitalize the SAIF, other
legislative proposals would combine the two deposit insurance funds of the
FDIC and merge the charters for federal savings associations and commercial
banks. The Issuer is unable to predict whether, or in what form, any of this
proposed legislation would be enacted.
67
<PAGE>
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Issuer will accept for exchange Old Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m.,
New York City time, on June 17, 1996; provided, however, that if the Issuer,
in its sole discretion, has extended the period of time for which the
Exchange Offer is open, the term "Expiration Date" means the latest time and
date to which the Exchange Offer is extended.
As of the date of this Prospectus, $140,000,000 aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about May 15, 1996, to all holders of
Old Notes known to the Issuer. The Issuer's obligation to accept Old Notes
for exchange pursuant to the Exchange Offer is subject to certain conditions
as set forth below under "--Certain Conditions to the Exchange Offer."
The Issuer expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the holders thereof as described below.
During any such extension, all Old Notes previously tendered will remain
subject to the Exchange Offer and may be accepted for exchange by the Issuer.
Any Old Notes not accepted for exchange for any reason will be returned
without expense to the tendering holder thereof as promptly as practicable
after the expiration or termination of the Exchange Offer.
Old Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof.
The Issuer expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted
for exchange, upon the occurrence of any of the events specified below under
"--Certain Conditions to the Exchange Offer." The Issuer will give oral or
written notice of any extension, amendment, non-acceptance or termination to
the holders of the Old Notes as promptly as practicable, such notice in the
case of any extension to be issued by means of a press release or other
public announcement no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Issuer of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Issuer will constitute a binding
agreement between the tendering holder and the Issuer upon the terms and
subject to the conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal. Except as set forth below, a holder who
wishes to tender Old Notes for exchange pursuant to the Exchange Offer must
transmit a properly completed and duly executed Letter of Transmittal,
including all other documents required by such Letter of Transmittal, to The
Bank of New York, as Exchange Agent, at the address set forth below under
"--Exchange Agent" on or prior to the Expiration Date. In addition, either
(i) certificates for such Old Notes must be received by the Exchange Agent
along with the Letter of Transmittal, or (ii) a timely confirmation of a
book-entry transfer (a "Book-Entry Confirmation") of such Old Notes, if such
procedure is available, into the Exchange Agent's account at The Depository
Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedure
for book-entry transfer described below, must be received by the Exchange
Agent prior to the Expiration Date, or (iii) the holder must comply with the
guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF OLD
NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
ISSUER.
68
<PAGE>
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Notes who
has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution (as defined herein). In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantees must be by a firm
which is a member of a registered national securities exchange or a member of
the National Association of Securities Dealers, Inc. or by a commercial bank
or trust company having an office or correspondent in the United States
(collectively, "Eligible Institutions"). If Old Notes are registered in the
name of a person other than a signer of the Letter of Transmittal, the Old
Notes surrendered for exchange must be endorsed by, or be accompanied by a
written instrument or instruments of transfer or exchange, in satisfactory
form as determined by the Issuer in its sole discretion, duly executed by,
the registered Holder with the signature thereon guaranteed by an Eligible
Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined
by the Issuer in its sole discretion, which determination shall be final and
binding. The Issuer reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Issuer or
its counsel, be unlawful. The Issuer also reserves the absolute right to
waive any defects or irregularities or conditions of the Exchange Offer as to
any particular Old Notes either before or after the Expiration Date
(including the right to waive the ineligibility of any holder who seeks to
tender Old Notes in the Exchange Offer). The interpretation of the terms and
conditions of the Exchange Offer as to any particular Old Notes either before
or after the Expiration Date (including the Letter of Transmittal and the
instructions thereto) by the Issuer shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with
tenders of Old Notes for exchange must be cured within such reasonable period
of time as the Issuer shall determine. Neither the Issuer, the Exchange Agent
nor any other person shall be under any duty to give notification of any
defect or irregularity with respect to any tender of Old Notes for exchange,
nor shall any of them incur any liability for failure to give such
notification.
If the Letter of Transmittal is signed by a person or persons other than
the registered holder or holders of Old Notes, such Old Notes must be
endorsed or accompanied by appropriate powers of attorney, in either case
signed exactly as the name or names of the registered holder or holders that
appear on the Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Issuer, proper evidence satisfactory to the Issuer of their authority to
so act must be submitted.
By tendering, each holder will represent to the Issuer that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the holder, and that neither the holder
nor such other person has any arrangement or understanding with any person to
participate in the distribution of the New Notes. In the case of a holder
that is not a broker-dealer, each such holder, by tendering, will also
represent to the Issuer that such holder is not engaged in, or intends to
engage in, a distribution of the New Notes. If any holder or any such other
person is an "affiliate," as defined under Rule 405 of the Securities Act, of
the Issuer, or is engaged in or intends to engage in or has an arrangement or
understanding with any person to participate in a distribution of such New
Notes to be acquired pursuant to the Exchange Offer, such holder or any such
other person (i) could not rely on the applicable interpretations of the
staff of the SEC and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each broker-dealer that receives New Notes for its own account
in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution." The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
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<PAGE>
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange
Offer, the Issuer will accept, promptly after the Expiration Date, all Old
Notes properly tendered and will issue the New Notes promptly after
acceptance of the Old Notes. See "--Certain Conditions to the Exchange
Offer." For purposes of the Exchange Offer, the Issuer shall be deemed to
have accepted properly tendered Old Notes for exchange when, as and if the
Issuer has given oral or written notice thereof to the Exchange Agent, with
written confirmation of any oral notice to be given promptly thereafter.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid,
from January 31, 1996. Accordingly, if the relevant record date for interest
payment occurs after the consummation of the Exchange Offer registered
holders of New Notes on such record date will receive interest accruing from
the most recent date to which interest has been paid or, if no interest has
been paid, from January 31, 1996. If, however, the relevant record date for
interest payment occurs prior to the consummation of the Exchange Offer
registered holders of Old Notes on such record date will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid, from January 31, 1996. Old Notes accepted for
exchange will cease to accrue interest from and after the date of
consummation of the Exchange Offer, except as set forth in the immediately
preceding sentence. Holders of Old Notes whose Old Notes are accepted for
exchange will not receive any payment in respect of accrued interest on such
Old Notes otherwise payable on any interest payment date the record date for
which occurs on or after consummation of the Exchange Offer. If the Exchange
Offer is not consummated by July 1, 1996, the rate per annum at which the Old
Notes bear interest will be 9 5/8 % per annum from and including July 1, 1996
until but excluding the date of consummation of the Exchange Offer.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of certificates for such Old Notes or a timely
Book-Entry Confirmation of such Old Notes into the Exchange Agent's account
at the Book-Entry Transfer Facility, a properly completed and duly executed
Letter of Transmittal and all other required documents. If any tendered Old
Notes are not accepted for any reason set forth in the terms and conditions
of the Exchange Offer or if Old Notes are submitted for a greater principal
amount that the holder desired to exchange, such unaccepted or non-exchanged
Old Notes will be returned without expense to the tendering holder thereof
(or, in the case of Old Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry procedures described below, such non-exchanged Old Notes will be
credited to an account maintained with such Book-Entry Transfer Facility) as
promptly as practicable after the expiration or termination of the Exchange
Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with
respect to the Old Notes at the Book-Entry Transfer Facility for purposes of
the Exchange Offer within two business days after the date of this
Prospectus, and any financial institution that is a participant in the
Book-Entry Transfer Facility's systems may make book-entry delivery of Old
Notes by causing the Book-Entry Transfer Facility to transfer such Old Notes
into the Exchange Agent's account at the Book-Entry Transfer Facility in
accordance with such Book-Entry Transfer Facility's procedures for transfer.
However, although delivery of Old Notes may be effected through book-entry
transfer at the Book-Entry Transfer Facility, the Letter of Transmittal or
facsimile thereof, with any required signature guarantees and any other
required documents, must, in any case, be transmitted to and received by the
Exchange Agent at one of the addresses set forth below under "--Exchange
Agent" on or prior to the Expiration Date or the guaranteed delivery
procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to
70
<PAGE>
reach the Exchange Agent before the Expiration Date, or the procedure for
book-entry transfer cannot be completed on a timely basis, a tender may be
effected if (i) the tender is made through an Eligible Institution, (ii)
prior to the Expiration Date, the Exchange Agent received from such Eligible
Institution a properly completed and duly executed Letter of Transmittal (or
a facsimile thereof) and Notice of Guaranteed Delivery, substantially in the
form provided by the Issuer (by telegram, telex, facsimile transmission, mail
or hand delivery), setting forth the name and address of the holder of Old
Notes and the amount of Old Notes tendered, stating that the tender is being
made thereby and guaranteeing that within five New York Stock Exchange
("NYSE") trading days after the date of execution of the Notice of Guaranteed
Delivery, the certificates for all physically tendered Old Notes, in proper
form for transfer, or a Book-Entry Confirmation, as the case may be, and any
other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent, and (iii) the certificates
for all physically tendered Old Notes, in proper form for transfer, or a
Book-Entry Confirmation, as the case may be, and all other documents required
by the Letter of Transmittal, are received by the Exchange Agent within five
NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"--Exchange Agent." Any such notice of withdrawal must specify the name of
the person having tendered the Old Notes to be withdrawn, identify the Old
Notes to be withdrawn (including the principal amount of such Old Notes), and
(where certificates for Old Notes have been transmitted) specify the name in
which such Old Notes are registered, if different from that of the
withdrawing holder. If certificates for Old Notes have been delivered or
otherwise identified to the Exchange Agent, then, prior to the release of
such certificates the withdrawing holder must also submit the serial numbers
of the particular certificates to be withdrawn and signed notice of
withdrawal with signatures guaranteed by an Eligible Institution unless such
holder is an Eligible Institution. If Old Notes have been tendered pursuant
to the procedure for book-entry transfer described above, any notice of
withdrawal must specify the name and number of the account at the Book-Entry
Transfer Facility to be credited with the withdrawn Old Notes and otherwise
comply with the procedures of such facility. All questions as to the
validity, form and eligibility (including time of receipt) of such notices
will be determined by the Issuer, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any
Old Notes which have been tendered for exchange but which are not exchanged
for any reason will be returned to the holder thereof without cost to such
holder (or, in the case of Old Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry transfer procedures described above, such Old Notes will be
credited to an account maintained with such Book-Entry Transfer Facility for
the Old Notes) as soon a practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "--Procedures
for Tendering Old Notes" above at any time on or prior to the Expiration
Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Issuer
shall not be required to accept for exchange, or to issue New Notes in
exchange for, any Old Notes and may terminate or amend the Exchange Offer, if
at any time before the acceptance of such Old Notes for exchange or the
exchange of the New Notes for such Old Notes, any of the following events
shall occur:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order of decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (i) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking
any damages as a result thereof, or (ii) resulting in a material delay in
the ability of the Issuer to accept for exchange or exchange some or all
of the Old Notes
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pursuant to the Exchange Offer; or any statute, rule, regulation, order or
injunction shall be sought, proposed, introduced, enacted, promulgated or
deemed applicable to the Exchange Offer or any of the transactions
contemplated by the Exchange Offer by any government or governmental
authority, domestic or foreign, or any action shall have been taken,
proposed or threatened, by any government, governmental authority, agency
or court, domestic or foreign, that in the sole judgment of the Issuer
might directly or indirectly result in any of the consequences referred to
in clauses (i) or (ii) above or, in the sole judgment of the Issuer, might
result in the holders of New Notes having obligations with respect to
resales and transfers of New Notes which are greater than those described
in the interpretation of the SEC referred to on the cover page of this
Prospectus, or would otherwise make it inadvisable to proceed with the
Exchange Offer; or
(b) there shall have occurred (i) any general suspension of or general
limitation on prices for, or trading in, securities on any national
securities exchange or in the over-the-counter market, (ii) any limitation
by any governmental agency or authority which may adversely affect the
ability of the Issuer to complete the transactions contemplated by the
Exchange Offer, (iii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States or any
limitation by any governmental agency or authority which adversely affects
the extension of credit or (iv) a commencement of a war, armed hostilities
or other similar international calamity directly or indirectly involving
the United States, or, in the case of any of the foregoing existing at the
time of the commencement of the Exchange Offer, a material acceleration or
worsening thereof; or
(c) any change (or any development involving a prospective change)
shall have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Issuer and its subsidiaries taken as a whole that, in the
sole judgment of the Issuer, is or may be adverse to the Issuer, or the
Issuer shall have become aware of facts that, in the sole judgment of the
Issuer, have or may have adverse significance with respect to the value of
the Old Notes or the New Notes;
which in the reasonable judgment of the Issuer in any case, and regardless of
the circumstances (including any action by the Issuer) giving rise to any
event described above, makes it inadvisable to proceed with the Exchange
Offer and/or with such acceptance for exchange or with such exchange.
The foregoing conditions are for the sole benefit of the Issuer and may be
asserted by the Issuer regardless of the circumstances giving rise to any
such condition or may be waived by the Issuer in whole or in part at any time
and from time to time in its sole discretion. The failure by the Issuer at
any time to exercise any of the foregoing rights shall not be deemed a waiver
of any such right and each such right shall be deemed an ongoing right which
may be asserted at any time and from time to time.
In addition, the Issuer will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes,
if at such time any stop order shall be threatened or in effect with respect
to the Registration Statement of which this Prospectus constitutes a part or
the qualification of the Indenture under the Trust Indenture Act of 1939 (the
"TIA").
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EXCHANGE AGENT
The Bank of New York has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at one of the addresses set forth below. Questions and
requests for assistance, requests for additional copies of this Prospectus or
of the Letter of Transmittal and requests for Notices of Guaranteed Delivery
should be directed to the Exchange Agent addressed as follows:
Delivery To: The Bank of New York, Exchange Agent
<TABLE>
<CAPTION>
BY MAIL: BY OVERNIGHT COURIER OR HAND:
<S> <C>
The Bank of New York The Bank of New York
101 Barclay Street -- (7 East) 101 Barclay Street -- (7 East)
Reorganization Section Reorganization Section
New York, New York 10286 Corporate Trust Services Window
Attention: Enrique Lopez New York, New York 10286
Attention: Enrique Lopez
</TABLE>
By Facsimile:
(212) 571-3080
Confirm by Telephone:
(212) 815-2742
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET
FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF
TRANSMITTAL.
FEES AND EXPENSES
The Issuer will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Issuer and are estimated in the aggregate to be
$850,000.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who
instruct the Issuer to register New Notes in the name of, or request that Old
Notes not tendered or not accepted in the Exchange Offer be returned to, a
person other than the registered tendering holder will be responsible for the
payment of any applicable transfer tax thereon.
CONSEQUENCES OF EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions
in the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old
Notes may not be offered or sold, unless registered under the Securities Act,
except pursuant to an
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exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Issuer does not currently anticipate
that it will register Old Notes under the Securities Act. See "Description of
the Notes--Registration Rights." Based on interpretations by the staff of the
SEC, as set forth in no-action letters issued to third parties, the Issuer
believes that New Notes issued pursuant to the Exchange Offer in exchange for
Old Notes may be offered for resale, resold or otherwise transferred by
holders thereof (other than any such holder which is an "affiliate" of the
Issuer within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement or
understanding with any person to participate in the distribution of such New
Notes. However, the Issuer does not intend to request the SEC to consider,
and the SEC has not considered, the Exchange Offer in the context of a
no-action letter and there can be no assurance that the staff of the SEC
would make a similar determination with respect to the Exchange Offer as in
such other circumstances. Each holder, other than a broker-dealer, must
acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of New Notes and has no arrangement or understanding to
participate in a distribution of New Notes. If any holder is an affiliate of
the Issuer, is engaged in or intends to engage in or has any arrangement or
understanding with respect to the distribution of the New Notes to be
acquired pursuant to the Exchange Offer, such holder (i) could not rely on
the applicable interpretations of the staff of the SEC and (ii) must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any resale transaction. Each broker-dealer that
receives New Notes for its own account in exchange for Old Notes, where such
Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such New Notes. See "Plan of
Distribution." In addition, to comply with the state securities laws, the New
Notes may not be offered or sold in any state unless they have been
registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with. The offer
and sale of the New Notes to "qualified institutional buyers" (as such term
is defined under Rule 144A of the Securities Act) is generally exempt from
registration or qualification under the state securities laws. The Issuer
currently does not intend to register or qualify the sale of the New Notes in
any state where an exemption from registration or qualification is required
and not available.
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BUSINESS
GENERAL
The Issuer
The Issuer is a holding company chartered under the laws of the state of
Delaware whose only significant asset is all of the common stock of the Bank.
As such, the Issuer's principal business operations are conducted by the Bank
and its subsidiaries.
The Issuer is 80% owned indirectly by MacAndrews Holdings, a corporation
wholly owned through Mafco Holdings by Ronald O. Perelman, and is 20% owned
by Hunter's Glen, a limited partnership controlled by Gerald J. Ford,
Chairman of the Board, Chief Executive Officer and a director of the Bank.
See "Ownership of the Common Stock."
The Issuer's operations are significantly influenced by general economic
conditions in the markets and geographic areas in which the Bank conducts its
business, the monetary and fiscal policies of the federal government and the
regulatory policies of certain governmental agencies. Deposit balances and
the cost of borrowings are influenced by interest rates on competing
investments and general market interest rates. The Issuer's loan volume and
yields are also impacted by market interest rates on loans, the supply of and
demand for housing, and the availability of funds.
The Bank
First Nationwide's principal business consists of operating retail deposit
branches and originating and/or purchasing one to four family real estate
loans and, to a lesser extent, certain consumer loans, and is conducted
primarily in California, Florida and Texas. The Bank also actively manages
its portfolio of commercial real estate loans acquired through acquisitions
and is active in mortgage banking and loan servicing. These operating
activities are financed principally with customer deposits, secured
short-term and long-term borrowings, collections on loans, asset sales and
retained earnings. At December 31, 1995, the Bank had approximately $14.6
billion in assets and approximately $10.2 billion in deposits. According to
published sources, the Bank was the seventh largest thrift in the United
States, in terms of assets, as of June 30, 1995.
The Bank is chartered as a federal stock savings bank under the HOLA and
regulated by the OTS and the FDIC, which, through the SAIF, insures the
deposit accounts of First Nationwide. The Bank is also a member of the FHLBS.
Revenues are derived from interest charged on loans, interest and
dividends received on securities and mortgage-backed securities, fees
received in connection with loan servicing, securities brokerage and other
customer service transactions, and asset management fees. Expenses primarily
consist of interest on customer deposit accounts, interest on short-term and
long-term borrowings, general and administrative expenses consisting of
compensation and benefits, data processing, occupancy and equipment,
communications, deposit insurance assessments, advertising and marketing,
professional fees and other general and administrative expenses.
Background
The Bank was organized as First Gibraltar in December 1988 to acquire
substantially all of the assets and certain liabilities of the Texas Closed
Banks in a federally assisted transaction. The Texas Closed Banks were
purchased effective December 28, 1988 pursuant to five substantially similar
acquisition agreements and the Assistance Agreement. In January 1992, certain
provisions of the Assistance Agreement were renegotiated and amended or
modified. In connection with such modification, the Bank accrued the present
value of the estimated liability at December 31, 1992 to the FSLIC/RF for the
reimbursement by the Bank to the FSLIC/RF in an amount equal to 10% of the
gross amount of assistance received by the Bank from the FSLIC/RF and a fee
payable by the FSLIC/RF to the Bank for the
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disposition of a Covered Asset at a price in excess of 50% of such asset's
original book value ("Shared Gains") over the life of the Assistance
Agreement, resulting in a $60 million charge to operations in 1992. See
"--Other Activities--The Assistance Agreement."
On December 31, 1992, First Gibraltar sold or otherwise transferred a
substantial portion of its business operations in Oklahoma, consisting of
approximately $3 million of loans and 27 branches with $809 million in
deposits in the First Gibraltar Oklahoma Sale. A gain of $19 million was
recorded in connection with this sale.
On February 1, 1993, First Gibraltar sold to BankAmerica certain assets,
liabilities and substantially all of the branch operations located in Texas
consisting of approximately $829 million of loans and 130 branches with
approximately $6.9 billion in deposits in the First Gibraltar Texas Sale. A
gain of $141 million was recorded in connection with this sale. In
anticipation of the First Gibraltar Texas Sale, management sold long-term
interest-earning assets, primarily loans and mortgage-backed securities,
based on BankAmerica's intention to acquire primarily shorter-term assets. As
a result, First Gibraltar recognized gains on the sale of interest-earning
assets totalling $203 million during the year ended December 31, 1992.
Concurrently with the First Gibraltar Texas Sale, the Bank changed its name
to First Madison.
Following the First Gibraltar Texas Sale, and through September 1994,
First Madison's principal business was the funding of the Covered Assets and
the performance of its obligations under the Assistance Agreement. Subsequent
to the First Gibraltar Texas Sale, the Bank also managed four retail branches
in Texas and supplemented its retail deposit base with wholesale funds from
Brokered Deposits and FHLB advances. In June 1995, the FDIC, as manager for
the FSLIC/RF, exercised its right under the Assistance Agreement to purchase
substantially all of the remaining Covered Assets as of June 1, 1995 at the
fair market value of such assets and further purchased additional assets from
the remaining Covered Asset portfolio in September 1995. Any losses sustained
by the Bank as a result of the FDIC Purchase have been reimbursed under the
Capital Loss Coverage provision of the Assistance Agreement except for $39
million which the FDIC has elected to treat as a Covered Asset at December
31, 1995. Proceeds from this transaction were reinvested in the normal course
of business.
From August 1991 through March 31, 1993, the Issuer conducted most of its
mortgage banking operations through FGMH. Effective July 1, 1992, FGMH
acquired all of the outstanding stock of the mortgage banking company Troy
and Nichols, Inc. of Monroe, Louisiana, with a servicing portfolio of 129,000
loans totalling approximately $5.9 billion. This transaction was accounted
for under the purchase method of accounting. On March 31, 1993, the stock of
FGMH was distributed by the Bank to its then immediate parent. FGMH was
subsequently sold during 1993 for a gain of approximately $95 million.
On April 14, 1994, the Bank entered into the Asset Purchase Agreement with
Old FNB. On October 3, 1994, effective immediately after the close of
business on September 30, 1994, the Bank purchased the FNB Acquired Business
in the FN Acquisition for $726.5 million. Effective on October 1, 1994, the
Bank changed its name from "First Madison Bank, FSB" to "First Nationwide
Bank, A Federal Savings Bank." The Bank and Old FNB are currently in
disagreement over certain elements of the purchase price for the FN
Acquisition. See "--Legal Proceedings." On October 7, 1994, the Bank sold the
FNB Acquired Business' branch network located in Illinois consisting of 26
branches with approximately $1.2 billion in deposits. The $89 million deposit
premium received by the Bank was treated as a reduction of the core deposit
intangible asset established in connection with the FN Acquisition.
The Bank financed the FN Acquisition and paid related fees and expenses
with: (i) a capital contribution by the Issuer funded with the net proceeds
of (a) the issuance of the Issuer's Senior Notes and (b) the issuance of its
class C common stock, (ii) the net proceeds from the issuance of the Bank
Preferred Stock and (iii) existing cash and proceeds from securities sold
under agreements to repurchase. See "Certain Transactions."
In December 1994, the Bank's wholly owned mortgage bank operating
subsidiary, FNMC, entered into a series of agreements with the Resolution
Trust Corporation as conservator for StanFed to acquire
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certain of StanFed's mortgage servicing assets and assume certain of
StanFed's mortgage servicing liabilities for approximately $178 million in
the Maryland Acquisition. As a result of the Maryland Acquisition, FNMC
acquired a 1-4 unit residential mortgage loan servicing portfolio of
approximately $11.4 billion (including a subservicing portfolio of $1.8
billion) and certain other assets and liabilities. The transaction was
consummated on February 28, 1995. In connection with the Maryland
Acquisition, FNMC has moved its mortgage servicing operations to Maryland
from its former location in Sacramento, California. Costs totalling $5.7
million associated with such consolidation are included in noninterest
expense in the Issuer's consolidated statement of operations for the year
ended December 31, 1995.
In April 1995, the Bank closed substantially all of its retail mortgage
loan production offices. Costs associated with such closures of approximately
$2.1 million are included in noninterest expense in the Issuer's consolidated
statement of operations for the year ended December 31, 1995.
In April 1995, First Nationwide consummated the Tiburon Purchase in which
it acquired approximately $13 million in deposits located in Tiburon,
California from East-West Federal Bank, a federal savings bank. In August
1995, the Bank consummated the ITT Purchase in which it acquired three retail
branches located in Orange County, California with deposit accounts
approximately $356 million from ITT Federal Bank, fsb. On December 8, 1995,
the Bank consummated the Sonoma Purchase in which it acquired four retail
branches located in Sonoma County, California with deposit accounts of
approximately $144 million from Citizens Federal Bank, a Federal Savings
Bank. The weighted average deposit premium paid in connection with the Branch
Purchases was 3.78%.
On February 1, 1996, the Bank consummated the SFFed Acquisition pursuant
to which the Bank acquired SFFed and its wholly owned federal savings
association subsidiary, San Francisco Federal. The aggregate consideration
paid in the SFFed Acquisition was approximately $264 million. Following
completion of the SFFed Acquisition, SFFed was liquidated and San Francisco
Federal was merged into First Nationwide Bank. See "Strategic Acquisitions
and Dispositions--Acquisitions--The SFFed Acquisition."
On October 2, 1995, FNMC purchased in the LMUSA 1995 Purchase from LMUSA a
loan servicing portfolio of approximately $11.1 billion (including a
sub-servicing portfolio of $3.1 billion), a master servicing portfolio of
$2.9 billion and other assets, principally existing loans and loan production
operations of LMUSA, for $100 million, payable in installments, and the
assumption of certain indebtedness relating to the acquired loan portfolio.
On January 31, 1996, FNMC purchased in the LMUSA 1996 Purchase LMUSA's
remaining $14.1 billion loan servicing portfolio (including a sub-servicing
portfolio of $2.4 billion), a master servicing portfolio of $2.7 billion,
$5.9 million in foreclosed real estate, $45.3 million in net other servicing
receivables, $5.8 million in mortgage loans, and $6.2 million in net other
assets for a purchase price of approximately $160.8 million payable in
installments. The initial installment of $49.8 million was paid with existing
cash.
On December 19, 1995, the Bank entered into a merger agreement with HFFC,
pursuant to which the Bank will acquire HFFC and its wholly owned federally
chartered savings association subsidiary, Home Federal which, at December 31,
1995, had approximately $718 million in assets and $625 million in deposits
and operated 15 branches in the Northern California area. The aggregate
consideration to be paid in connection with the Home Federal Acquisition is
estimated to be approximately $70.6 million.
The Home Federal Acquisition is subject to approval by HFFC's
shareholders. The Home Federal Acquisition is presently anticipated to close
in the second quarter of 1996, although there can be no assurance that the
Home Federal Acquisition will be consummated. The Issuer expects that First
Nationwide will remain "well capitalized" after consummation of the Home
Federal Acquisition.
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From September through December of 1995, First Nationwide entered into the
following agreements relating to the Branch Sales:
<TABLE>
<CAPTION>
NUMBER OF APPROXIMATE APPROXIMATE
GENERAL BRANCHES TO AMOUNT OF AMOUNT OF DATE OF
NAME OF PURCHASER LOCATION BE SOLD DEPOSITS (A) ASSETS (A) AGREEMENT
- ------------------------- -------------- ------------ ------------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Fifth Third Bank of Ohio 28 $1,414,695 $18,480 9/22/95
Northeastern Ohio
North Fork Bank Long Island, 10 602,014 8,222 9/28/95
New York
Middletown Savings Bank Upstate New 8 485,975 5,594 9/29/95
York
Independence Savings Bank Brooklyn, New 3 330,073 3,308 10/11/95
York
Republic National Bank of Manhattan, New 3 282,580 1,795 10/31/95
New York York
Midlantic Bank New Jersey 4 509,597 5,556 11/03/95
Independence Savings Bank Staten Island, 2 286,723 3,718 11/15/95
New York
Charter One Bank Michigan 21 783,965 12,667 12/14/95
------------ ------------- -------------
Total 79 $4,695,622 $59,340
============ ============= =============
</TABLE>
- ------------
(a) As of December 31, 1995.
The Branch Sales, when consummated, will result in gains which, based on
deposit information at December 31, 1995, will be approximately $366 million
on a pre-tax basis. The gains from the Branch Sales will be used, as
necessary, to augment the Bank's regulatory capital to maintain its "well
capitalized" status after the SFFed Acquisition.
The Ohio Branch Sale was consummated on January 19, 1996. The Northeast
Branch Sales were consummated in a series of closings that occurred between
January 12, 1996 and March 22, 1996. The sale of these 58 branches has
generated pre-tax gains of approximately $308 million. Although regulatory
approval for the Michigan Branch Sale has been obtained and it is anticipated
that the Michigan Branch Sale will be consummated during the second quarter
of 1996, no assurances can be given as to whether or when such transaction
will be consummated.
BUSINESS STRATEGY
The Bank's business strategy is to augment its position as a leading
thrift in California, principally through a combination of selective
acquisitions of high quality assets and deposits, expansion of its mortgage
banking and servicing operations and continued increases in its operating
efficiency. The key elements of this business strategy are as follows.
Concentration and Expansion in California
Beginning with the FN Acquisition in 1994, the Bank developed a strategy
to concentrate its retail branch network in California. The management of
First Nationwide believes that the West Coast region, and California in
particular, offers attractive opportunities to continue to build franchise
value. The Bank continues to actively explore opportunities to expand its
California retail branch network, including
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through additional acquisitions. The SFFed Acquisition, the Home Federal
Acquisition and the Branch Purchases are consistent with this strategy and,
in the aggregate, have added, or will add, $3.8 billion in deposits. The
SFFed Acquisition, net of the related consolidation of branches, increased
the number of First Nationwide Northern California branches from 37 to 63,
and, based on information as of December 31, 1995, increased the outstanding
balances of First Nationwide's deposits in this region by $2.7 billion, from
approximately $1.9 billion to approximately $4.6 billion. In addition, the
Branch Purchases added another seven California branches, and the Home
Federal Acquisition will increase the number of Northern California branches
by 10 on a net basis. Management believes that these acquisitions have
significantly increased First Nationwide's presence on the West Coast,
providing additional economies of scale and diversity of operations within
its target California markets.
Following the consummation of the Branch Sales, the Bank will have
consolidated its branch system to California, Texas and Florida. Although the
Bank has no current plans to dispose of its remaining branch operations
outside California, it will continue to evaluate opportunities to dispose of
such operations, as well as other acquisition opportunities in such states.
As a result of the Branch Sales, the Issuer expects the Bank to reduce
certain operational costs inherent in its widely dispersed branch network.
Gains generated by the Branch Sales and sales of other branch operations
outside of California, if any, are expected to be used to finance the
acquisition of branch operations in the West Coast region.
Mortgage Banking
The Bank, through FNMC, has significantly expanded its mortgage banking
operations and enhanced efficiency. In February 1995, the Bank purchased a
larger and more efficient mortgage loan servicing facility located in
Frederick, Maryland as part of the Maryland Acquisition. Subsequently, all of
FNMC's mortgage servicing has been consolidated in Frederick, Maryland, and
the Sacramento, California servicing facility has been closed. FNMC acquired
additional mortgage servicing from LMUSA in the LMUSA 1995 Purchase during
the fourth quarter of 1995 and on January 31, 1996 in the LMUSA 1996
Purchase. The management of the Bank estimates that at December 31, 1995, the
existing loan servicing portfolio of FNMC (excluding loans serviced for the
Bank) and the servicing portfolios included in the LMUSA Purchases would have
aggregated approximately $41.4 billion. The Maryland Acquisition and the
LMUSA Purchases will provide the Bank with the opportunity to increase its
noninterest income through fees generated from its mortgage servicing
operations. The Bank's excess servicing capacity and existing servicing
expertise enabled it to accommodate the loan servicing portfolios acquired in
these transactions without the need for significant additional investment.
First Nationwide intends to increase its origination of residential loans
through enhanced focus on existing distribution channels, principally
correspondent origination and wholesale acquisitions. The LMUSA 1995 Purchase
included the acquisition of a correspondent lending operation of one of the
largest originators of Government National Mortgage Association ("GNMA")
loans in the United States. In order to minimize the exposure to market
interest rate fluctuations typically associated with long-term fixed rate
lending, First Nationwide intends to continue to retain in its portfolio the
majority of its ARMs, while selling most of its fixed rate mortgage loans.
First Nationwide intends to continue to retain servicing on loans that it
sells. The number of loans serviced by others and participation loans is
expected to be reduced by cancelling contracts or selling assets following a
cost-benefit analysis. In addition, First Nationwide intends to continue to
evaluate opportunities to increase its servicing portfolio through purchases.
First Nationwide intends to make its loan portfolio more liquid and
marketable by consolidating participation loans and modifying some existing
loans in order to create a standard product. In addition, First Nationwide
intends to increase front-end loan production fees on loans originated
through the retail branch system.
Protecting Credit Quality
First Nationwide will continue to originate single-family residential
loans and consumer loans in accordance with stringent underwriting standards.
The management of First Nationwide expects
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originations of new commercial real estate loans to be limited to its
participation in affordable housing programs which extend loans to
multifamily projects.
When evaluating acquisition opportunities, First Nationwide considers the
quality of assets to be acquired along with the strategic location of the
branches and characteristics of the deposit base. First Nationwide has
declined to bid on potential acquisitions where its due diligence
investigation raised concerns about asset quality that could not be
mitigated.
The Bank's sizeable portfolio of multi-family and commercial real estate
loans increased 31% as a result of the SFFed Acquisition. Management will
continue to actively review this portfolio of seasoned commercial real estate
loans to determine when credit action is necessary. Credit action may include
the sale of eligible loans acquired in the FN Acquisition to Granite under
the Put Agreement. See "--Other Activities--Put Agreement."
The Bank continuously manages its credit risk by assessing the current and
estimated future performance of the real estate markets in which it operates.
The Bank continues to place a high degree of emphasis on the management of
its asset portfolio. First Nationwide has a comprehensive process for
classifying assets, and asset reviews are performed on a periodic basis. The
Bank's asset portfolio is stratified based on geographic and collateral type
concentrations and delinquency trends. The objective of the review process is
to identify significant trends and determine the levels of loss exposure to
the Bank that would require increases to specific and general valuation
allowances.
Operating Efficiency
First Nationwide has implemented programs to expand its customer base,
increase transaction account volumes and generally enhance the efficiency of
its operations. A bank-wide cost reduction project resulted in the
consolidation of certain administrative and managerial functions and other
measures to be implemented by the end of 1996.
The Bank has improved its efficiency ratio from approximately 62.2% on an
annualized basis during the fourth quarter of 1994 to approximately 56.0% on
an annualized basis during the fourth quarter of 1995. The efficiency ratio
represents the ratio of noninterest expense to net interest income and
noninterest income. Management anticipates that the SFFed Acquisition, the
Branch Sales and the Home Federal Acquisition will enable the Bank to enhance
the value of its franchise and further improve its operating efficiency. By
concentrating its operations in the West Coast region, First Nationwide has
increased its presence and enhanced its ability to attract and retain retail
customers in its largest market. The Issuer expects that First Nationwide
will achieve increased efficiency in its combined institution through the
consolidation or elimination of duplicative back office operations and
administrative and management functions, a process it began to implement
immediately upon the closing of the SFFed Acquisition. First Nationwide
presently estimates that it will save approximately $40 million in annual
noninterest expenses as compared to operating SFFed on a stand-alone basis.
Management continues to evaluate ways in which it can achieve increased
efficiency from the combination of its operations with those of SFFed, and is
in the process of developing its rationalization plan to become effective
upon closing the Home Federal Acquisition. In connection with the SFFed
Acquisition and the consolidation of SFFed's operations with those of First
Nationwide, the Bank expects to capitalize acquisition costs totalling
approximately $15 million. The Branch Sales will also improve the
efficiencies of First Nationwide's retail operations by reducing the need for
multi-state back office support and by allowing the Bank to concentrate its
marketing activities in an area in which the Bank has a larger market
presence.
Service to Community
The needs of the communities in which First Nationwide is located will
also be met through First Nationwide's Community Reinvestment Act ("CRA")
program. First Nationwide continues to be committed to the needs of its
communities through its CRA program. First Nationwide received an
"outstanding" rating in its most recent CRA exam completed in 1995.
The implementation of the preceding strategies is subject to numerous
contingencies beyond management's control. These contingencies include
general and regional economic conditions, competi-
80
<PAGE>
tion and changes in regulation and interest rates. Accordingly, no assurance
can be given that any of the Issuer's strategies will prove to be effective
or that the Issuer's goals will be achieved.
LENDING ACTIVITIES
During the time between the First Gibraltar Texas Sale and the FN
Acquisition, the Bank's lending activity was limited. Loan originations
focused on second lien home improvement lending, with a limited number of
residential mortgage loans made. In addition, the Bank made several loans to
address special community housing needs through its CRA program.
Since the FN Acquisition, the Bank's principal lending activity has been
the origination of adjustable and fixed rate mortgage loans secured by
residential properties. To a lesser extent, First Nationwide also originates
consumer loans consisting principally of adjustable rate home equity lines of
credit. The current commercial lending activity of First Nationwide is
limited to restructuring and refinancing existing portfolio loans, and
multi-family loans originated under its affordable housing program. First
Nationwide also participates in a number of other affordable housing programs
and initiatives.
First Nationwide's residential loan origination activities are conducted
by FNMC. Throughout this Prospectus, references to the Bank and its
residential loan origination servicing activities relate to functions
performed by FNMC. In April 1995, FNMC concluded that the costs of operating
retail offices outweighed the benefits and, accordingly, closed substantially
all of its retail mortgage production offices. Residential loans continue to
be originated through FNMC's wholesale origination offices (wherein loans are
purchased from independent loan brokers) and the Bank's retail branches. FNMC
originates ARMs on single-family residential properties, which in the case of
ARMs originated prior to September 30, 1995, have generally been held for
investment, and fixed rate loans, which are generally held for sale to the
secondary mortgage market. Subsequent to September 30, 1995, however, all of
the ARMs originated were sold in the secondary market in anticipation of the
SFFed Acquisition. On October 2, 1995, FNMC acquired the correspondent loan
purchase operation of LMUSA as well as contracts to administer various
housing bond and other private mortgage lending programs.
First Nationwide generates consumer loan applications at its retail
branches. In addition, the Bank conducts direct-mail solicitations,
principally of its existing customers, for both secured and, to a much lesser
extent, unsecured revolving loans. All consumer loan processing, servicing
and collection operations are centralized at a facility in Oak Brook,
Illinois.
The following table reflects, for the periods indicated, the net change in
the total principal balances of loans receivable outstanding, excluding loans
held for sale, for the Issuer and its subsidiaries:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
---------- --------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Real estate loans originated:
Loans to purchase existing property .............. $ 959 $ 419 $ 27
Loans for construction, including loans in process -- -- 2
---------- --------- -------
Total real estate loans originated .............. 959 419 29
Other loans originated ............................. 224 61 26
Loans purchased .................................... 751 11,753 2
---------- --------- -------
Total loans originated and purchased ............ 1,934 12,233 57
Loans sold, securitized, repaid and foreclosed:
Loans sold (1) ................................... (380) (155) (300)
Loans securitized ................................ (376) (1,339) --
Loan repayments and payoffs ...................... (1,922) (387) (539)
Loan foreclosures ................................ (93) (25) (32)
---------- --------- -------
Total loans sold, securitized, repaid and
foreclosed ..................................... (2,771) (1,906) (871)
Other changes in loans receivable .................. (308) (40) (51)
---------- --------- -------
Net increase/(decrease) in loans receivable (2) .. $(1,145) $10,287 $(865)
========= =======
</TABLE>
- ------------
(1) Includes loans sold pursuant to the Put Agreement totalling $199.5
million and $104.2 million in 1995 and 1994, respectively.
(2) Excludes allowance for loan losses, purchase accounting adjustments,
unearned discounts and loan fees, and loans in process.
81
<PAGE>
Interest Rates, Terms and Fees
First Nationwide offers a variety of ARM products with the objectives of
(i) matching, as closely as possible, the interest rate sensitivity of its
assets with the interest rate sensitivity of its interest-bearing liabilities
and (ii) maintaining a relatively stable net interest margin in varied
interest rate environments. In response to consumer demand, and in order to
diversify its loan portfolio and help to control its future interest rate
risk, First Nationwide's loan portfolio includes several ARM products which
vary as to (i) the frequency and amount of periodic interest rate changes and
(ii) the minimum and maximum rates applied to a particular loan. ARMs have
the advantage of reducing an institution's sensitivity to interest rate
fluctuations. However, they also present certain risks not associated with
traditional fixed rate mortgages, such as adjustments in interest rates which
could cause payment increases that some borrowers might be unable to service.
First Nationwide attempts to mitigate the credit risks associated with
mortgage lending activities by the use of strict underwriting standards.
Substantially all residential loans originated are underwritten to conform
with standards adopted by the Federal National Mortgage Association ("FNMA"),
the Federal Home Loan Mortgage Corporation ("FHLMC"), GNMA, or other
secondary market investors. Accordingly, First Nationwide's underwriting
standards include LTV ratios and maximum loan amounts for both fixed rate
loans and ARMs that closely mirror secondary market requirements. Generally,
where these standards differ, specific strong compensating factors are
required. With respect to ARMs, First Nationwide underwrites the borrower's
ability to pay at the maximum second year payment rate, consistent with
secondary market requirements.
In addition to the interest earned on its loans, First Nationwide charges
fees for loan originations, loan prepayments and modifications, late
payments, changes of property ownership and other similar services. The
amount of this fee income varies with the volume of loan originations,
prepayments, the general economic conditions affecting the portfolio and
other competitive factors affecting the mortgage market.
Generally, late charges are assessed when payments are delinquent. On
loans secured by residential properties, these charges are generally limited
to 4% to 6% of the overdue payment of principal and interest and cannot be
imposed until the payment is more than 15 days late, in accordance with the
contractual terms of the loans and regulatory requirements in effect when the
loans were made.
82
<PAGE>
Composition of Loan Portfolio
The composition of the Issuer's loan portfolio, excluding Covered Assets
and loans held for sale, is set forth in the following table, at the dates
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------
1995 1994 1993 1992 1991
-------- -------- ------ ------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Real estate loans:
1-4 unit residential ............. $ 5,423 $ 5,612 $ 19 $ 40 $1,891
5+ unit residential .............. 1,854 2,178 -- -- --
Commercial real estate ........... 1,716 2,015 10 138 96
Land ............................. 9 15 -- -- --
Construction ..................... -- 8 -- -- --
------- ------- ---- ------ -----
Total real estate loans ......... 9,002 9,828 29 178 1,987
Equity-line and consumer loans ..... 171 492 5 631 866
Commercial loans ................... 2 1 -- 90 136
------- ------- ---- ------ -----
Total loans receivable ........... 9,175 10,321 34 899 2,989
Less:
Unearned discounts and loan fees . (19) -- 3 55 376
Loans in process ................. -- -- -- 52 49
Allowance for loan losses ........ 210 203 2 14 23
Purchase accounting adjustments,
net ............................ 153 151 -- 1 --
------- ------- ---- ------ -----
Loans receivable, net ........... $ 8,831 $ 9,967 $ 29 $777 $2,541
======= ======= ==== ====== =====
</TABLE>
The composition of First Nationwide's loan portfolio is similar to that of
SFFed. SFFed's loan portfolio and the percent of the total portfolio
represented by each type of loan are set forth below as of December 31, 1995:
<TABLE>
<CAPTION>
OUTSTANDING PERCENTAGE OF
LOAN BALANCES TOTAL
--------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Real estate loans:
1-4 unit residential ............ $1,536 55.41%
5+ unit residential ............. 628 22.26
Commercial real estate .......... 465 16.77
Land and construction ........... 40 1.44
--------------- ---------------
Total real estate loans ...... 2,669 96.28
Consumer loans ................... 95 3.43
Loans secured by savings account 8 .29
--------------- ---------------
Total loans receivable ........ $2,772 100.00%
=============== ===============
</TABLE>
83
<PAGE>
The following table presents the Issuer's real estate loan portfolio
(excluding loans held for sale and loans subject to the Assistance
Agreement), by collateral type, by interest rate type and by state
concentration at December 31, 1995:
<TABLE>
<CAPTION>
1-4 UNIT 5+ UNIT COMMERCIAL
RESIDENTIAL RESIDENTIAL AND OTHER TOTAL REAL
------------------- ------------------- ------------------- ESTATE % OF
STATE VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED LOANS TOTAL
- --------------- ---------- ------- ---------- ------- ---------- ------- ----------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California ..... $2,729 $238 $ 798 $ 91 $1,128 $141 $5,125 56.93%
New York ....... 404 73 215 115 48 40 895 9.94
Illinois ....... 160 76 41 7 40 18 342 3.80
Florida ........ 102 46 39 33 31 12 263 2.92
Ohio ........... 93 83 28 8 32 3 247 2.74
New Jersey ..... 115 28 62 9 8 4 226 2.51
Hawaii ......... 198 19 -- 1 4 -- 222 2.47
Washington ..... 78 8 52 8 25 1 172 1.91
Colorado ....... 97 53 1 4 -- -- 155 1.72
Texas .......... 75 48 2 18 1 5 149 1.66
Other states(1) 517 183 242 80 151 33 1,206 13.40
---------- ------- ---------- ------- ---------- ------- ------------ --------
Total ......... $4,568 $855 $1,480 $ 374 $1,468 $257 $9,002 100.00%
========== ======= ========== ======= ========== ======= ============ ========
</TABLE>
- ------------
(1) Real estate loans involving property located in 39 states, Puerto Rico
and the District of Columbia; not more than 1.5% of the total amount of such
loans are located in any one state.
The following table summarizes the Issuer's loan portfolio not subject to
the Assistance Agreement, excluding loans held for sale, at December 31,
1995, based upon various contractually scheduled principal payments allocated
to the indicated maturity categories. This table does not reflect expected
prepayments.
<TABLE>
<CAPTION>
OVER ONE BUT
DUE WITHIN WITHIN FIVE OVER FIVE
ONE YEAR YEARS YEARS TOTAL
---------- ------------ ------------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Real estate loans:
1-4 unit residential:
Fixed rate ................. $ 9 $ 57 $ 789 $ 855
Variable rate .............. 4 25 4,539 4,568
5+ unit residential:
Fixed rate ................. 25 129 220 374
Variable rate .............. 97 515 868 1,480
Commercial and other
Fixed rate ................. 21 81 155 257
Variable rate .............. 121 473 874 1,468
---------- ------------ ------------ -------
Total ..................... 277 1,280 7,445 9,002
Commercial and consumer loans:
Fixed rate ................. 19 10 5 34
Variable rate .............. 40 4 95 139
---------- ------------ ------------ -------
Total ..................... 59 14 100 173
---------- ------------ ------------ -------
Total loans receivable .... $336 $1,294 $7,545 $9,175
========== ============ ============ =======
</TABLE>
84
<PAGE>
Residential Lending
First Nationwide currently offers three primary residential ARM programs,
and a variety of fixed rate programs with maturities ranging from 15 to 30
years. Adjustable rate programs include loans which: (i) provide for monthly
interest rate adjustments, after the third or sixth month from inception of
the loan, based on the FHLB 11th District Cost of Funds, (ii) provide for
annual rate adjustments based upon the weekly average yield on U.S. Treasury
Securities adjusted to a constant maturity of one year, or (iii) provide for
semi-annual rate adjustments based on the weekly average of the secondary
market rates on six-month negotiable certificates of deposit. Some ARMs offer
an option to convert to a fixed rate after the first year through the fifth
year of the loan term. A variety of features are incorporated into ARM loans
to protect borrowers from unlimited adjustments in interest rates and
payments. All ARMs have lifetime caps which limit the amount of rate
increases over the life of the loan. ARMs whose rates adjust annually have
rate caps which limit the amount that rates can change to two percentage
points per year. Loans which adjust monthly based upon the FHLB 11th District
Cost of Funds limit payment changes to no more than 7.5% of the payment
amount per year. This may lead to monthly payments which are less than the
amount necessary to amortize the loan to maturity at the interest rate in
effect for any particular month. In the event that the monthly payment is not
sufficient to pay interest accruing on the loan during the month, this
deficiency is added to the loan's principal balance (i.e., negative
amortization). The total outstanding principal balance for a particular loan
is not allowed to exceed 110% of the original loan amount as a result of
negative amortization. If the loan reaches 110% of the original loan amount,
the loan payment is recalculated to the payment sufficient to repay the
unpaid principal balance in full at the maturity date. As of December 31,
1995, the Bank's capitalized interest relative to such residential loans was
approximately $1.8 million. This amount represents approximately .16% of the
approximately $1.1 billion of residential ARMs that have the potential to
experience negative amortization. First Nationwide also originates 15 and 30
year fully amortizing fixed rate residential loans under a variety of fixed
rate programs, primarily for resale in the secondary mortgage market. When
loans are sold, FNMC normally retains the servicing of the loan. See
"--Mortgage Banking Operations" for a further discussion of these activities.
Multi-family, Commercial and Other Real Estate Lending
While First Nationwide currently originates multi-family, commercial and
other real estate loans only as they relate to affordable housing programs,
the Bank's loan portfolio includes loans secured by multi-family residential,
commercial, industrial and unimproved real property. Such loans are
principally acquired through acquisitions. First Nationwide's variable rate
multi-family and commercial real estate loans have a maximum amortized loan
term of 30 years with some loans having balloon payments due in one to
fifteen years. ARMs primarily adjust with the FHLB 11th District Cost of
Funds or the six-month Treasury Bill indices with a monthly or semi-annual
rate adjustment. The terms and characteristics of the ARMs originated for
multi-family and commercial real estate lending purposes are similar to those
for residential lending. As such, many of the same risks and protections
related to residential borrowers are present in the multi-family and
commercial real estate portfolios, including the potential for negative
amortization. Negative amortization for multi-family and commercial real
estate loans is allowed to increase the outstanding principal balance to 110%
of the original loan amount. If the loan reaches 110% of the original loan
amount, all future interest rate increases will increase the monthly payment
to amortize the loan over the remaining life of the loan. At December 31,
1995, the Bank's capitalized interest relative to such loans was
approximately $1 million, which represents approximately .12% of the $878
million of multi-family and commercial real estate loans that have the
potential to experience negative amortization.
Real estate loans secured by multi-family and commercial property
represent a significant portion of First Nationwide's portfolio. The
management of First Nationwide periodically reviews the multi-family and
commercial real estate loan portfolio. At December 31, 1995 and 1994, the
multi-family and commercial real estate loan portfolio totalled $3.6 billion
and $4.2 billion, respectively. Included in the multi-family and commercial
real estate loan portfolio at December 31, 1995 are $131 million of loans
with credit enhancement wherein the lead participant subordinated its
minority interest in a pool of loans to First Nationwide's interest in the
corresponding pool of loans. No loans are subject to be repurchased by the
seller in the event such loans become 90 days delinquent.
85
<PAGE>
First Nationwide Bank's potential for loss on the multi-family and
commercial loan portfolio acquired from Old FNB and, to a lesser extent, the
residential mortgage loan portfolio acquired from Old FNB, is mitigated to
the extent of the remaining balance under the Put Agreement entered into by
the Bank with Granite, an affiliate of Old FNB, in connection with the FN
Acquisition. At December 31, 1995, $387.6 million had been put to Granite,
leaving a remaining balance available under the Put Agreement to be put of
$112.4 million. See "--Other Activities--The Put Agreement" for a description
of the Put Agreement.
In addition to managing its own asset portfolio, the Bank and its wholly
owned subsidiary, FGB Realty, managed non-performing loan (principally
multi-family and commercial real estate) and asset portfolios totalling $1.3
billion and $1.6 billion, respectively, for investors. Revenues related to
such activities are reflected as management fees in the Issuer's consolidated
statements of operations. Certain of this servicing was acquired from Old FNB
which had sold loans with certain recourse provisions. The recourse liability
was assumed by the Bank in the FN Acquisition and at December 31, 1995, the
balance of multi-family and commercial real estate loans sold with recourse
totalled $181.3 million.
Consumer Lending
First Nationwide's consumer loan originations are primarily concentrated
in home equity lending. At December 31, 1995, the home equity portfolio
totaled $399 million, representing 80.3% of the total consumer loan portfolio
of $497 million. At December 31, 1995, consumer loans with a carrying value
of $326 million (recorded at lower of aggregate amortized cost or market
value) are held for sale. On February 23, 1996, approximately $298 million of
such loans were sold. At December 31, 1994, the home equity portfolio
totalled $409 million, or 83.1% of the total consumer loan portfolio of $492
million. The portfolio is geographically dispersed and correlates closely to
retail deposit branch distribution.
First Nationwide offers an adjustable, prime interest rate-based home
equity line of credit on owner-occupied residential properties. In
determining the amount of credit to be extended, all loans secured by the
collateral properties are aggregated and compared to the appraised value of
the properties. First Nationwide's policy is to extend credit up to a maximum
combined LTV ratio of 80%.
Other consumer loan products include: fixed rate home equity installment
loans; adjustable prime rate based home equity loans, which while secured,
are based on repayment ability and credit history; auto and boat loans;
unsecured lines of credit; overdraft protection; and loans secured by
certificates of deposit.
At December 31, 1995 SFFed held a consumer loan portfolio of approximately
$95 million, 91% of which consisted of home equity line of credit loans. The
remaining 9% consisted of loans secured primarily by autos, boats and other
personal property collateral.
Loans Held for Sale
The carrying value of the Bank's loans held for sale portfolio consisted
of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
-------- ------
(IN MILLIONS)
<S> <C> <C>
Single-family residential mortgage loans .. $ 877 $26
Consumer loans, primarily home equity loans 326 --
-------- ------
$1,203 $26
======== ======
</TABLE>
Loans held for sale are carried at the lower of cost or market value. The
significant increase in single family residential mortgage loans held for
sale is attributed to the higher loan production volumes in 1995 compared to
1994. In addition, substantially all ARMs originated subsequent to September
30, 1995 were sold or held for sale in the secondary market in anticipation
of the SFFed Acquisition. Prior to that time, most ARMs originated were held
by First Nationwide for investment. The consumer loans held for sale
generally represent loans in states where First Nationwide has contracted to
sell the retail deposits.
86
<PAGE>
Origination of Residential Loans
First Nationwide originates residential loans principally through the
efforts of wholesale origination offices where loans are purchased from
independent loan brokers, and, to a lesser degree, staff loan agents. To
promote continuity of customer service, help meet credit needs and to
increase opportunities to sell customer deposit and other financial services
offered by First Nationwide and its subsidiaries, loan inquiries from retail
branch customers and "walk-in" applicants are encouraged. These inquiries are
initially processed by retail branch office personnel, with support provided
by regional lending offices. The residential loan agents are compensated
principally on a commission basis. Closed mortgage loans are also acquired by
FNMC through a correspondent lending operation acquired from LMUSA on October
2, 1995.
The majority of real estate loans originated by First Nationwide have LTV
ratios of 80% or less in accordance with its underwriting criteria. First
Nationwide has originated loans with LTV ratios of up to 95%, with the
portion of the loan exceeding 80% guaranteed by private mortgage insurance,
the premiums of which are paid monthly by the borrower. Certain exceptions to
this guideline have been made for low and moderate income borrowers. However,
the principal balance of loans subject to such exceptions is not significant
in terms of the Issuer's total loan originations. The value of the property
offered as security for a mortgage loan is determined by a professionally
qualified appraiser approved by First Nationwide, who may or may not be an
employee of First Nationwide. As further security for its loan, at the time
of loan funding, First Nationwide requires title insurance and fire and
casualty insurance on all loans secured by liens on real property. The Bank
also requires flood insurance on any loan secured by real property if the
property lies within a U.S. Housing and Urban Development Department
("HUD")-designated flood hazard area. First Nationwide does not originate
loans secured by properties located in HUD-designated flood hazard areas in
communities that do not participate in the National Flood Insurance Program.
Mortgage Banking Operations
Mortgage banking operations have been an integral part of the business
activities of First Nationwide since the FN Acquisition. FNMC was
incorporated in June 1994 as a wholly owned operating subsidiary of the Bank.
In the FN Acquisition, the Bank acquired certain of Old FNB's residential
mortgage operations, which were transferred to FNMC in exchange for a
combination of debt and equity held by the Bank.
Mortgage banking activities allow the generation of fee income without the
associated capital retention requirements attributable to traditional real
estate lending activities. Generally, First Nationwide originates fixed rate
residential loans for sale in the secondary mortgage market. ARMs originated
prior to September 30, 1995 have generally been held by the Bank for
investment. Subsequent to September 30, 1995, however, all of the ARMs
originated were sold or held for sale in the secondary market in anticipation
of the SFFed Acquisition. First Nationwide employs forward sale hedging
techniques to minimize the interest rate and pricing risks associated with
the origination and sale of fixed rate loans.
At the time of origination, management identifies residential loans that
are expected to be sold in the foreseeable future. At December 31, 1995,
management had identified $877.4 million of single-family residential real
estate loans as held for sale. These loans have been classified as assets
held for sale in the consolidated statement of financial condition at
December 31, 1995 and are recorded at the lower of aggregate amortized cost
or market value. At December 31, 1995, First Nationwide had forward
commitments to sell loans totalling $572.4 million. In addition, $235.2
million of the loans held for sale were funded under pre-existing purchase
commitments to various housing bond programs and the California Public
Employees Retirement System.
The servicing portfolio of FNMC (including loans serviced for First
Nationwide) approximates $33.6 billion and 571,000 loans as of December 31,
1995. Further, the LMUSA 1996 Purchase increased the loan servicing portfolio
by approximately $14.1 billion and 268,000 loans. Substantially all of FNMC's
loans are serviced in a 220,000 square-foot facility in Frederick, Maryland
acquired from StanFed.
87
<PAGE>
Since the FN Acquisition, First Nationwide has sold fixed rate, and,
adjustable rate whole loans secured by residential properties to FNMA, FHLMC,
and private investors. Mortgage loan sales totalled $1.4 billion and $47
million in 1995 and 1994 respectively.
Old FNB occasionally sold loans under recourse provisions; such liability
was assumed by the Bank in the FN Acquisition. As of December 31, 1995, the
balance of loans sold with certain recourse provisions was $151.9 million.
First Nationwide, through FNMC, has generally retained the right to
service the loans it has sold. FNMC collects from the borrower payments of
principal and interest and, after retaining a servicing fee, remits the
balance to the investors.
In accounting for its mortgage loan sales prior to April 1, 1995, a gain
or loss was recognized based on the sum of three components: (i) the
difference between the cash proceeds of the loan sales and the Bank's book
value of the loans; (ii) the "excess servicing," if any; less (iii)
provisions for estimated losses to be incurred from limited recourse
obligations, if any. Excess servicing results in a capitalized asset that
reflects the discounted present value of any difference between the interest
rate received from the borrower and the interest rate passed through to the
purchaser of the loan, less a "normal servicing fee" (dependent upon loan
type), which is retained as compensation for future servicing costs. The
amount of excess servicing recognized in any particular loan sale depends
significantly upon three factors upon which estimates or assumptions must be
employed: (i) the estimated life of the loans, (ii) the discount rate used in
calculating discounted present value and (iii) the "normal servicing fee."
The excess servicing asset is amortized as an offset to servicing fee
income using the interest method adjusted for actual prepayment experience
over the estimated remaining servicing lives of the loans sold. First
Nationwide monitors the prepayments on the loans serviced for investors and
reduces the balance of the asset if the actual prepayments are in excess of
the estimated prepayment trends used to record the original asset. First
Nationwide's assumptions relative to prepayment speed, discount and servicing
fee rates are revised periodically to reflect current market conditions and
regulatory requirements.
Effective April 1, 1995, the Issuer adopted SFAS No. 122. SFAS No. 122
requires that, when a mortgage loan is sold and servicing rights are
retained, a portion of the cost of originating a mortgage loan be allocated
to the mortgage servicing rights based on its fair market value. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General-- Accounting Changes" for a description of SFAS No. 122.
At December 31, 1995, FNMC owned rights to service approximately $27.1
billion of whole loans, participation interests and mortgage-backed
securities for others. These loans had an average balance of $52,791, a
weighted average coupon rate of 8.58%, a weighted average maturity of 262
months and a service fee spread of .49%. The greater than 30 day delinquency
rate on these loans at December 31, 1995 was 3.82%. The Bank subserviced for
others approximately $3.3 billion of whole loans, participation interests and
mortgage-backed securities. These loans had an average balance of $60,709, a
weighted average coupon rate of 8.36% and a weighted average remaining
maturity of 286 months. The servicing fee collected on these loans is passed
through to the primary servicer with First Nationwide retaining a flat
subservice fee that is netted out of the monthly remittance. Although First
Nationwide has no risk for loans subserviced, the greater than 30 day
delinquency rate on these loans is 7.46%. For the year ended December 31,
1995, gross revenue for such servicing activities totalled $94.3 million.
On October 2, 1995, FNMC purchased the stock of Lomas Mortgage Services
Inc., in the LMUSA 1995 Purchase, which is a 33% owner of Lomas Mortgage
Partnership L.P. ("LMP") and its managing general partner. LMP owns the
mortgage servicing rights to approximately $3.1 billion of loans serviced for
FNMA, GNMA, FHLMC and private investors. LMP's investment in such servicing
rights and its other assets are partially funded by independent bank lines of
credit totalling approximately $27 million. LMP has no employees or physical
operations but discharges its obligations under its servicing contracts under
a subservicing contract with FNMC. See "--General--Background."
88
<PAGE>
NON-PERFORMING ASSETS
The Issuer's exposure to losses relative to certain assets acquired in the
FN Acquisition that become non-performing or otherwise problematic prior to
November 30, 1996 is mitigated to the extent the Issuer is able to put such
loans to Granite under the Put Agreement. See "--Other Activities--The Put
Agreement."
Classification of Assets
Savings institutions are required to classify their assets on a regular
basis, establish prudent allowances for loan losses and make quarterly
reports of troubled asset classification to the OTS. Assets must be
classified as "pass," "special mention," "substandard," "doubtful" or "loss."
An asset is generally designated as "special mention" if potential weaknesses
are identified that, if left uncorrected, would result in deterioration of
the repayment prospects for the asset. An asset, or a portion thereof, is
generally classified as "substandard" if it possesses a well-defined weakness
which could jeopardize the timely liquidation of the asset or realization on
the collateral at the asset's book value. Thus, these assets are
characterized by the possibility that the institution will sustain some loss
if the deficiencies are not corrected. An asset, or portion thereof, is
classified as "doubtful" if identified weaknesses make collectibility or
liquidation in full highly questionable and improbable. An asset, or a
portion thereof, that is considered to be uncollectible is classified "loss."
It should be noted that First Nationwide does not maintain assets in a loss
classification category; rather, the carrying value of all troubled assets is
reduced by any amount considered to be uncollectible. The appropriate OTS
Regional Director has the authority to approve, disapprove or modify any
asset classification or any amount established as an allowance pursuant to
such classification. Savings institutions must maintain adequate general
valuation allowances in accordance with generally accepted accounting
principles and federal regulations for assets classified as "substandard" or
"doubtful" and either immediately write off assets classified as "loss" or
establish specific valuation allowances equal to the amounts classified as
"loss."
First Nationwide has a comprehensive process for classifying assets, and
asset reviews are performed on a periodic basis. Such reviews are prioritized
according to an asset's risk characteristics, such as loan size, collateral
type and/or location, and potential loan performance problems. The objective
of the review process is to identify significant trends and determine the
levels of loss exposure to First Nationwide that would require increases to
specific and general valuation allowances.
Loan Portfolio Risk Elements
When a borrower fails to make a contractually required payment on a loan,
the loan is characterized as delinquent. In most cases delinquencies are
cured promptly; however, foreclosure proceedings, and, in some cases, workout
proceedings, are generally commenced if the delinquency is not cured. The
procedures for foreclosure actions vary from state to state, but generally if
the loan is not reinstated within certain periods specified by statute, the
property securing the loan can be acquired through foreclosure by the lender.
While deficiency judgments against the borrower are available in some of the
states in which First Nationwide originates loans, the value of the
underlying collateral property is usually the principal source of recovery
available to satisfy the loan balance.
In general, loans are placed on nonaccrual status after being
contractually delinquent for more than 90 days. When a loan is placed on
nonaccrual status, all interest previously accrued but not received is
reversed, unless the loan is put eligible under the Put Agreement, in which
case 90 days of interest remains accrued. First Nationwide may modify or
restructure a loan as a result of a borrower's inability to service the
obligation under the original terms of the loan agreement. Management
believes that losses currently arising out of loans on nonaccrual status and
loans contractually past due 91 days or more, acquired from Old FNB, are
eliminated to the extent such loans are sold under the Put Agreement.
89
<PAGE>
The following table indicates the carrying value of Bank's loans,
excluding loans subject to the Assistance Agreement, which have been placed
on nonaccrual status, as well as the carrying value of foreclosed real
estate, at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------
1995 1994 1993 1992 1991
---------- ------- ----------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Real estate:
1-4 unit residential .................. $ 136 $ 133 $ 2 $ 7 $ 52
5+ unit residential ................... 23 24 9 -- --
Commercial and other .................. 9 11 -- -- --
Land .................................. -- 7 -- -- --
Construction .......................... -- 2 -- -- --
----- ------- ------ ------ -------
Total real estate .................... 168 177 11 7 52
Equity-line and consumer ............... 3 4 -- 4 2
----- ------- ------ ------ -------
Total nonaccrual loans ............... 171 181 11 11 54
Foreclosed real estate, net ............. 49 37 -- -- --
----- ------- ------ ------ -------
Total non-performing assets .......... $220(a) $ 218 $ 11 $11 $54
===== ======= ====== ====== =======
Non-performing loans as a percentage of
the Bank's total loans ................. 1.71% 1.81% 37.61%(b) 1.42% 2.12%
====== ======= ====== ===== =======
Non-performing assets as a percentage of
the Bank's total assets ................ 1.50% 1.49% .98% .12% .53%
====== ======= ======= ====== =======
</TABLE>
- ------------
(a) Of the $220 million in total non-performing assets, approximately $13.5
million were eligible to be sold to Granite pursuant to the Put
Agreement.
(b) The significant increase in the percentage of non-performing loans to
total loans at December 31, 1993 from December 31, 1992 reflects the
decrease in loans receivable from $899 million at December 31, 1992 to
$34 million at December 31, 1993. The level of total non-performing
assets over that time period remained relatively constant.
Interest income of $6.1 million was received and recognized for nonaccrual
loans during 1995, instead of $15.3 million which would have been recognized
had the loans performed in accordance with their original terms. The Issuer
has had no loans contractually past due 90 days or more on accrual status in
the past five years.
The following table indicates loans classified as troubled debt
restructurings, net of purchase accounting adjustments, and excluding loans
subject to the Assistance Agreement, at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Restructured loans:
1-4 unit residential ..... $ 8 $ 19 $-- $-- $--
5+ unit residential ....... 147 204 -- -- --
Commercial and other ..... 79 110 -- -- --
------ ------ ------ ------ ------
Total restructured loans $234 $333 $-- $-- $--
====== ====== ====== ====== ======
</TABLE>
For the year ended December 31, 1995, interest income of $22 million was
recognized on restructured loans instead of the $33 million which would have
been recognized had the loans been performing in accordance with their
original terms. There were no non-real estate restructured loans in any of
the past five years.
Allowance for Loan Losses
The Issuer charges current earnings with a provision for estimated credit
losses on loans receivable to bring the total allowance to a level deemed
appropriate by management. The provision considers both
90
<PAGE>
specifically identified problem loans and credit risks not specifically
identified in the loan portfolio. The allowance for loan losses is based on
such factors as the financial condition of the borrowers, the fair value of
the loan collateral, recourse to guarantors, the estimated net cost of
holding and maintaining properties and collateral prior to the anticipated
date of sale, analysis of delinquency trends, geographic and collateral-type
concentrations, past loss experience, regulatory policies, and other factors
related to the collectibility of the Issuer's loan portfolio.
The following table summarizes activity in the Issuer's allowance for loan
losses during the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ......... $203 $ 2 $ 15 $ 24 $15
Purchases -- FN Acquisition ............ -- 202 -- -- --
Provision for loan losses .............. 37 6 1 16 18
Charge-offs:
1-4 unit residential .................. (28) (4) -- (11)
Commercial real estate (a) ............ -- (4) -- -- --
Consumer and other .................... (5) (1) (1) (7)
Commercial ............................ -- -- (1) (1) --
----- ----- ---- ---- ---
Total charge-offs ................... (33) (9) (2) (19)
----- ----- ---- ---- ---
Recoveries ............................. 3 2 1 2 2
----- ----- ---- ---- ---
Net charge-offs ....................... (30) (7) (1) (17)
----- ----- ---- ---- ---
Allowance for losses assigned to
loans sold ............................ -- -- (13) (8) --
----- ----- ---- ---- ---
Balance at end of period ................ $ 210 $ 203 $ 2 $ 15 $24
===== ===== ==== ==== ===
</TABLE>
- ------------
(a) Lack of activity in the year ended December 31, 1995 is principally due
to the existence of the Put Agreement.
The following table sets forth the allocation of the allowance for loan
losses at the dates indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Specific reserves:
Real estate loans--1-4 unit
residential ........................... $ 1 $ 4 $-- $ 2 $1
General reserves:
Real estate loans:
1-4 unit residential ................. 115 105 2 13 23
5+ unit residential .................. 44 44 -- -- --
Commercial real estate ............... 41 41 -- -- --
Total real estate loans ............. 200 190 2 13 23
------ ------ ------ ------ ------
Equity-line and consumer loans ....... 9 9 -- -- --
Total general reserve ............... 209 199 2 13 23
------ ------ ------ ------ ------
Total allowance for loan losses ....... $210 $203 $ 2 $15 $24
====== ====== ====== ====== ======
</TABLE>
The table below provides ratios of net charge-offs to outstanding average
loan balances for the years indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Real estate:
1-4 unit residential .. 0.47% 0.06% 1.26% 1.13% 0.38%
Commercial real estate -- 0.10 0.19 0.01 --
Consumer and other ..... 1.00 0.23 0.24 0.94 0.57
Commercial .............. -- -- 1.29 1.06 --
</TABLE>
91
<PAGE>
Impaired Loans
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-- General--Accounting Changes" for a discussion of SFAS
No. 114 and the Bank's impaired loans as of December 31, 1995.
INVESTMENT ACTIVITIES
First Nationwide is required by OTS regulations to maintain a specified
minimum amount of liquid assets which may be invested in specified
securities. The Bank is also permitted to invest in certain other types of
securities. Securities balances (including cash equivalent securities)
exceeding minimum federal requirements are subject to change over time based
on First Nationwide's asset/liability funding needs and interest rate risk
management objectives. First Nationwide's liquidity levels take into
consideration anticipated future cash flows and all available sources of
credit. Liquidity is maintained at levels management believes is appropriate
to assure future flexibility in meeting anticipated funding needs including
deposit withdrawal requests, loan funding commitments, and other investment
or restructuring requirements.
During 1993 to 1995 the OTS required members of the FHLBS to maintain
eligible liquid assets as defined by federal regulations in an amount equal
to or greater than 5% of average deposits and borrowings due within one year.
Under applicable law, this liquidity requirement may be changed from time to
time by the OTS to any amount within the range of 4% to 10%, and the OTS has
the authority to prescribe liquidity requirements for different classes of
savings institutions, which classes may be determined in accordance with
criteria selected by the OTS. The Issuer was in compliance with this
regulation throughout 1995.
Cash Equivalents
The Issuer invests in federal funds sold, securities purchased under
agreements to resell and interest-bearing deposits in other banks from time
to time to help meet the Bank's regulatory liquidity requirements and as
temporary holdings until the funds can be otherwise deployed or invested.
Securities Available for Sale
The Issuer adopted SFAS No. 115 effective January 1, 1994. In November
1995, the FASB issued the Special Report which provided all entities an
opportunity to reassess their ability and intent to hold securities to
maturity and allowed a one-time reclassification of securities from
held-to-maturity to available-for-sale without "tainting" the remaining
held-to-maturity securities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General--Accounting Changes."
On December 29, 1995, the Issuer reclassified $1.5 billion and $231.8 million
in carrying value of mortgage-backed securities and U.S. government and
agency securities, respectively, from the respective held-to-maturity
categories to securities available for sale, and recorded an increase of
$22.5 million in stockholders' equity for the net unrealized gain on such
securities.
92
<PAGE>
The following summarizes the amortized cost and estimated fair value of
the Issuer's securities available for sale at the dates indicated (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------------
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Marketable equity securities ....... $ 34,000 $80,068 $ -- $ 80,068 $ 114,068
Mortgage-backed securities:
GNMA ............................... 14,018 906 -- 906 14,924
FNMA ............................... 294,070 5,643 -- 5,643 299,713
FHLMC .............................. 801,393 19,671 (1) 19,670 821,063
Collateralized mortgage obligations 345,699 793 (4,678) (3,885) 341,814
U.S. government and agency
obligations ........................ 231,794 2,768 (69) 2,699 234,493
------------ ------------ ------------ ------------ ------------
Total ............................. $1,720,974 $109,849 $(4,748) 105,101 $1,826,075
============ ============ ============ ============ ============
FDIC portion of unrealized gain on
marketable equity securities ...... (34,534)
Estimated tax effect ................ (7,055)
------------
Net unrealized holding gain in
stockholders' equity ............. $ 63,512
============
DECEMBER 31, 1994
--------------------------------------------------------------------
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
- ------------------------------------ ------------ ------------ ------------ ------------ ------------
Marketable equity securities ....... $ 34,000 $11,000 $ -- $ 11,000 $ 45,000
============ ============ ============ ============ ============
</TABLE>
At December 31, 1995, mortgage-backed securities available for sale
included securities totalling $63.4 million which resulted from the
securitization of certain qualifying mortgage loans from First Nationwide's
loan portfolio. There were no such securities classified as available for
sale at December 31, 1994 or 1993.
At December 31, 1995, mortgage-backed securities available for sale
included $979.0 million of variable-rate securities. No variable-rate
securities were classified as available for sale at December 31, 1994 or
1993.
Marketable equity securities available for sale represents approximately
25% of the outstanding common stock of Affiliated Computer Services ("ACS"),
representing 5% of the voting power, with an original cost basis of $34
million. At December 31, 1995, ACS stock closed at $37.50 per share on The
Nasdaq Stock Market, resulting in a total value of $114.1 million for the ACS
shares held by the Bank. Pursuant to the terms of a settlement agreement
dated June 17, 1991 between the Bank, ACS, and the FDIC, the FDIC is entitled
to share in a defined portion of the proceeds from the sale of the stock,
which, at December 31, 1995 and 1994, approximated $34.5 million and $0,
respectively, and which is recorded in other liabilities. Accordingly, the
net unrealized gain on the ACS stock, net of income taxes, reported as a
separate component of stockholders' equity at December 31, 1995 is $41.0
million. The ACS stock represents the only security classified as available
for sale at December 31, 1994.
The Issuer maintains a significant portfolio of mortgage-backed securities
as a means of investing in housing-related mortgage instruments without the
costs associated with originating mortgage loans for portfolio retention and
the credit risk of default which arises in holding a portfolio of loans to
maturity. By investing in mortgage-backed securities, management seeks to
achieve a positive spread over the cost of funds used to purchase these
securities. Mortgage-backed securities available for sale are carried at fair
value, with unrealized gains and losses excluded from earnings and reported
in a separate component of
93
<PAGE>
stockholders' equity. Premiums and discounts on the purchase of
mortgage-backed securities are amortized or accreted as a yield adjustment
over the life of the securities using the interest method, with the
amortization or accretion effect of prepayment being adjusted based on
revised estimates of future repayments.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which reduce credit risk. In addition, mortgage- backed
securities are more liquid than individual mortgage loans and may be used to
collateralize borrowings. Mortgage-backed securities issued or guaranteed by
FNMA or FHLMC (except interest-only securities or the residual interests in
collateralized mortgage obligations ("CMOs")) are weighted at no more than
20% for risk-based capital purposes, compared to a weight of 50% to 100% for
residential loans. See "Regulation--Regulation of Federal Savings Banks."
The following is a summary of privately issued CMO's with aggregate
carrying values in excess of 10% of stockholders' equity at December 31, 1995
(in millions):
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE
CARRYING VALUE MARKET VALUE
-------------- --------------
<S> <C> <C>
Residential Funding Mortgage Securities $ 77 $ 77
Solomon Brothers Mortgage Securities ... 56 56
-------------- --------------
$133 $133
============== ==============
</TABLE>
The Issuer held privately issued CMOs with an aggregate carrying value of
$274 million at December 31, 1995.
At December 31, 1995, the mortgage-backed securities acquired by the
Issuer have the highest credit rating from one or more of the national
securities rating agencies. Such credit rating, however, may be subject to
revision or withdrawal at any time by such rating agencies. The mortgage
backed securities which the Issuer purchases and maintains in its portfolio
include certain CMOs. A CMO is a special type of pay-through debt obligation
in which the stream of principal and interest payments on the underlying
mortgages or mortgage-backed securities is used to create classes with
different maturities and, in some cases, amortization schedules and a
residual class of the CMO security being sold, with each such class
possessing different risk characteristics. The residual interest sold
represents any residual cash flows which result from the excess of the
monthly receipts generated by principal and interest payments on the
underlying mortgage collateral and any reinvestment earnings thereon, less
the cash payments to the CMO holders and any administrative expenses. As a
matter of policy, due to the risk associated with residual interests, the
Issuer does not invest in the residual interests of CMOs.
Securities Held to Maturity
Substantially all of the Issuer's securities classified as held to
maturity were reclassified to available for sale at December 29, 1995.
The following summarizes the amortized cost and estimated fair value of
the Issuer's securities held to maturity at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
1995 1994 1993
------------------------ ------------------------ ------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
----------- ----------- ----------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
U.S. government and agency
obligations .................. $ -- $ -- $410 $407 $15 $15
Municipal and other securities 1 1 2 2 -- --
----------- ----------- ----------- ----------- ----------- -----------
Total ....................... $ 1 $ 1 $412 $409 $15 $15
=========== =========== =========== =========== =========== ===========
</TABLE>
94
<PAGE>
The weighted average stated interest rate on securities held to maturity
was 8.25%, 5.79% and 3.66% at December 31, 1995, 1994 and 1993, respectively.
Securities held to maturity at December 31, 1995 mature within one year.
Mortgage-backed Securities Held to Maturity
Substantially all of the Issuer's mortgage-backed securities, except for
mortgage-backed securities resulting from the securitization of certain of
the Bank's loans, were reclassified from the held-to-maturity portfolio to
the available-for-sale portfolio on December 29, 1995.
A summary of the Issuer's mortgage-backed securities to be held to
maturity at the dates indicated is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
1995 1994 1993
------------------------ ------------------------ ------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
----------- ----------- ----------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
GNMA ..... $ -- $ -- $ 16 $ 16 $ -- $ --
FNMA ..... 533 548 1,078 1,060 -- --
FHLMC .... 988 1,016 1,660 1,647 -- --
CMOs ..... -- -- 397 370 341 340
Other .... 3 3 3 3 -- --
----------- ----------- ----------- ----------- ----------- -----------
Total ... $1,524 $1,567 $3,154 $3,096 $341 $340
=========== =========== =========== =========== =========== ===========
</TABLE>
The weighted average stated interest rate on mortgage-backed securities
held to maturity was 7.46%, 6.30%, and 6.75% at December 31, 1995, 1994 and
1993, respectively. At December 31, 1995 and 1994, mortgage-backed securities
held to maturity included securities totalling $1.5 billion and $1.4 billion,
respectively, which resulted from the securitization of certain qualifying
mortgage loans from First Nationwide's loan portfolio. There were no such
securities held at December 31, 1993. At December 31, 1995 and 1994, these
securities include $1.5 billion and $1.3 billion, respectively, which have
been securitized with FNMA and FHLMC with full recourse to the Bank. At
December 31, 1995 and 1994, respectively, the Issuer had $1.5 billion and
$2.5 billion of variable rate mortgage-backed securities held to maturity. No
variable rate Mortgage-backed securities were held at December 31, 1993.
For the years ended December 31, 1995, 1994 and 1993, the Issuer
recognized no gains on sales of mortgage-backed securities held to maturity.
Mortgage-backed securities held to maturity are carried at amortized cost
rather than the lower of cost or market, unless there is evidence of a
decline other than a temporary decline in value. Anything other than
temporary declines in value are charged to income in the periods in which the
declines are determined. Premiums and discounts on the purchase of
mortgage-backed securities are amortized or accreted as a yield adjustment
over the life of the securities using the interest method, with the
amortization or accretion effect of prepayment being adjusted based on
revised estimates of future repayments.
The following table summarizes the Issuer's mortgage-backed securities
held-to-maturity portfolio and the related weighted average coupon rate at
December 31, 1995, based upon contractual scheduled maturities allocated to
the appropriate maturity categories. This table does not reflect the
scheduled amortization or any anticipated prepayment of the underlying loans
collateralizing such securities in the portfolio.
<TABLE>
<CAPTION>
OVER ZERO BUT OVER THREE OVER FIVE OVER TEN BUT
WITHIN THREE WAC BUT WITHIN WAC BUT WITHIN WAC WITHIN FIFTEEN OVER FIFTEEN
YEARS (1) FIVE YEARS (1) TEN YEARS (1) YEARS WAC (1) YEARS WAC(1) TOTAL
------------- ----- ------------ ----- ------------ ----- --------------- -------- --------------- ------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA ... $-- --% $-- --% $-- --% $-- --% $ 988 7.20% $ 988
FHLMC .. -- -- -- -- -- -- -- -- 533 7.93 533
Other .. -- -- -- -- -- -- 1 10.00% 2 8.14 3
$-- $-- $-- $ 1 $1,523 $1,524
==== ==== ==== ==== ====== ======
</TABLE>
- ------------
Weighted average coupon rate. (1)
95
<PAGE>
SOURCES OF FUNDS
General
Deposits, sales of securities under agreements to repurchase, advances
from the FHLBs of Dallas and San Francisco, and sales, maturities and
principal repayments on loans and mortgage-backed securities have been the
major sources of funds for use in First Nationwide's lending and investment
activities and other general business purposes. The management of First
Nationwide closely monitors rates and terms of competing sources of funds on
a daily basis and utilizes the source which is most cost-effective. The
availability of funds from sales of loans and securities is influenced by the
levels of general interest rates and other market conditions. For additional
information regarding the Issuer's sources of funds, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Issuer's Consolidated Statements of Cash Flows set forth in the Issuer's
Consolidated Financial Statements contained elsewhere in this Prospectus.
Loan principal and interest payments are a relatively stable source of
funds, while customer deposit inflows and outflows and loan repayments and
prepayments are influenced significantly by the levels of general interest
rates and money market conditions, and may fluctuate widely. Borrowings may
be used to compensate for reductions in normal sources of funds such as
customer deposits.
Deposits
First Nationwide offers a variety of deposit accounts designed to attract
both short-term and long-term deposits. There are no rate limitations on any
type of deposit account presently offered by First Nationwide. The ability of
the Bank to retain and attract new deposits is dependent upon the variety and
effectiveness of its customer account products, customer service and
convenience, and prevailing market conditions. The following table shows the
distribution of deposits by type of account at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------
1995 1994 1993
------------------------ ----------------------- -----------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT DEPOSITS AMOUNT DEPOSITS AMOUNT DEPOSITS
--------- ------------- -------- ------------- -------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Passbook accounts ....... $ 664 6.5% $ 685 7.5% $ 3 0.7%
Demand deposits:
Interest-bearing ....... 684 6.7 667 7.3 5 1.2
Noninterest-bearing ... 697 6.8 352 3.8 44 0.9
Money market deposit
accounts ............... 1,443 14.2 1,927 21.1 48 11.2
--------- ------------- -------- ------------- -------- -------------
Total transaction
accounts ............. 3,488 34.2 3,631 39.7 60 14.0
Term accounts ............ 6,696 65.8 5,519 60.3 370 86.0
--------- ------------- -------- ------------- -------- -------------
10,184 100.0% 9,150 100.0% 430 100.0%
============= ============= =============
Accrued interest payable 51 26 2
Purchase accounting
adjustments, net ........ 7 21 --
--------- ------------- -------- ------------- -------- -------------
Total ................. $10,242 $9,197 $432
========= ======== ========
</TABLE>
Deposit balances averaged $9.9 billion and $2.6 billion during 1995 and
1994 respectively, with average stated interest rates of 4.67% and 3.86%
respectively. The weighted average stated interest rates on deposits at
December 31, 1995 were 4.67% and 4.19% respectively. Deposit balances
averaged $2.6 billion and $1.2 billion during 1994 and 1993, respectively,
with average interest rates of 3.86% and 4.64%, respectively. The weighted
average stated interest rates on deposits at December 31, 1994 and 1993 were
4.19% and 4.41%, respectively.
96
<PAGE>
The following table presents the average balance and weighted average rate
paid on each deposit type at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------
1995 1994 1993
---------------------- ---------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Passbook accounts ... $ 666 2.20% $ 179 2.14% $ 192 2.67%
Demand deposits:
Interest-bearing ... 699 1.00 184 .97 42 2.02
Noninterest-bearing 583 -- 93 -- 11 --
Money market deposit
accounts ............ 1,581 3.22 547 2.98 32 2.79
Term accounts ......... 6,398 6.10 1,611 4.91 918 5.24
--------- ----------- --------- ----------- --------- -----------
Total ............... $9,927 4.67% $2,614 3.86% $1,195 4.64%
========= =========== ========= =========== ========= ===========
</TABLE>
The following table sets forth the scheduled maturities of term accounts
by stated interest rate at December 31, 1995.
<TABLE>
<CAPTION>
1999 AND
1996 1997 1998 THEREAFTER TOTAL
-------- -------- ------ ------------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
3.00% or less ......... $ 3 $ -- $-- $ -- $ 3
3.01 -- 4.00% ...... 104 9 -- -- 113
4.01 -- 5.00% ...... 311 16 27 13 367
5.01 -- 6.00% ...... 2,442 405 52 155 3,054
6.01 -- 7.00% ...... 1,336 361 35 212 1,944
7.01 -- 8.00% ...... 528 239 37 132 936
8.01 -- 9.00% ...... 71 40 5 7 123
9.01 -- 10.00% ...... 134 2 2 11 149
10.01 -- 11.00% ....... -- -- -- 4 4
11.01 -- 12.00% ....... -- -- -- 1 1
12.01 -- 13.00% ....... -- -- -- 2 2
-------- -------- ------ --------- ----------
Total term accounts $4,929 $1,072 $158 $537 $6,696
======== ======== ====== ========= ==========
</TABLE>
The following table sets forth remaining maturities for term deposits in
amounts of $100,000 or more at December 31, 1995 (in millions):
<TABLE>
<CAPTION>
<S> <C>
3 months or less ................... $168
Over 3 months but within 6 months . 141
Over 6 months but within 12 months 201
Over 12 months ..................... 180
------
Total ............................ $690
======
</TABLE>
At December 31, 1995, the aggregate amount outstanding of certificates of
deposit of $100,000 or larger was $690 million, compared with $523 million at
December 31, 1994. Deposits held by foreign investors totalled $63 million
and $58 million at December 31, 1995 and 1994 respectively. No such deposits
were held at December 31, 1993.
97
<PAGE>
First Nationwide's deposit accounts are held primarily by individuals
residing in the vicinity of its retail branch offices located throughout the
country. The Bank has emphasized, and will continue to emphasize, a retail
branch network for attracting deposits. Key market areas, particularly the
West Coast region, will continue to be targeted for expansion of retail
deposits and the cross-selling of additional consumer products.
When cost-effective relative to other sources of funding, First Nationwide
issues certificates of deposit through direct placement programs and national
investment banking firms ("Brokered Deposits"). These deposits are usually in
amounts less than $100,000 and are obtained from a diverse customer base.
While these funds are generally more costly than traditional passbook and
money market deposits and more volatile as a source of funds because of their
sensitivity to the rates offered, they supplement retail customer deposits in
raising funds for financing and liquidity purposes. At December 31, 1995,
First Nationwide had approximately $965 million of Brokered Deposits
outstanding, representing 9.47% of total deposits.
The following table presents the scheduled maturity of Brokered Deposits
and all other retail term deposits at December 31, 1995.
<TABLE>
<CAPTION>
1999 AND
1996 1997 1998 THEREAFTER TOTAL
-------- -------- ------ ------------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Brokered Deposits .... $ 523 $ 368 $ 5 $ 69 $ 965
Retail term deposits . 4,406 704 153 468 5,731
-------- -------- ------ ------------ --------
Total term deposits $4,929 $1,072 $158 $537 $6,696
======== ======== ====== ============ ========
</TABLE>
In April 1995, First Nationwide acquired approximately $13 million in
deposits located in Tiburon, California in the Tiburon Purchase. In August
1995, First Nationwide acquired three retail branches and associated deposit
accounts totalling approximately $356 million located in Orange County,
California in the ITT Purchase. On December 8, 1995, First Nationwide
acquired four retail branches located in Sonoma County, California with
associated deposit accounts of approximately $143.5 million as of December 7,
1995 in the Sonoma Purchase.
In connection with the Branch Sales and the SFFed and Home Federal
Acquisitions, total deposits sold will exceed deposits to be acquired,
resulting in a reduction in deposits. The average interest rate on deposits
will increase slightly because the deposit base acquired in the SFFed
Acquisition had a lower percentage of transaction accounts relative to term
deposit accounts.
Borrowings
The Issuer and the Bank utilize various borrowings as alternative sources
of funds for their business needs. These sources have included securities
sold under agreements to repurchase, FHLB advances and subordinated
debentures. The Bank will rely primarily on FHLB advances and securities sold
under agreements to repurchase to replace funding from deposits sold in the
Branch Sales.
Short-term Borrowings
The following table sets forth for each category of borrowings due within
one year: (i) for the periods presented, the average amount outstanding, the
maximum amount outstanding at any month end and the average interest rate
paid, and (ii) at period end, the amount outstanding and average interest
rate paid. Amounts and rates reflected in the table exclude accrued interest
payable and purchase accounting adjustments.
98
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------
1995 1994 1993
--------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding ........................ $ 862 $ 434 $369
Maximum amount outstanding at any month end
during the period ................................... 1,487 1,909 441
Balance outstanding at end of period ............... 1,487 1,049 441
Average interest rate during the period ............ 7.19% 6.56% 4.26%
Average interest rate at end of period ............. 6.12% 7.34% 4.54%
Securities sold under agreements to repurchase:
Average balance outstanding ........................ 1,351 499 21
Maximum amount outstanding at any month end
during the period ................................... 1,965 1,880 139
Balance outstanding at end of period ............... 698 1,880 119
Average interest rate during the period ............ 6.53% 3.78% 3.83%
Average interest rate at end of period ............. 6.06% 6.51% 3.45%
Real estate notes payable and revolving warehouse
line:
Average balance outstanding ........................ -- -- 3
Maximum amount outstanding at any month end
during the period ................................... -- -- 6
Balance outstanding at end of period ............... -- -- --
Average interest rate during the period ............ -- -- 12.50%
Average interest rate at end of the period ........ -- -- --
</TABLE>
At December 31, 1995, the Bank had additional secured borrowing capacity
of $5.1 billion with the FHLB and other sources. These collateralized funding
sources may also be used to satisfy other funding requirements.
Securities Sold Under Agreements to Repurchase
First Nationwide enters into reverse repurchase agreements whereby it
sells marketable U.S. government and mortgage-backed securities and CMOs with
a commitment to repurchase the securities at a specified price and on a
specified date. These agreements are recorded as financings, and the
obligation to repurchase assets sold is reflected as a liability on the
consolidated statement of financial condition. The dollar amount of assets
underlying the agreements remains in the asset accounts. The securities
underlying the agreements are delivered to the dealers who arranged the
transactions. The counterparty to the repurchase agreement may have loaned
the securities to other parties in the normal course of their operations;
however, all agreements require that the identical securities be resold to
First Nationwide at the maturity of the agreements. In order to reduce
possible risks associated with these borrowing transactions, the reverse
repurchase agreements are generally entered into with national investment
banking firms and major commercial banks which are primary dealers in these
securities.
During 1995, First Nationwide reduced the level of funds borrowed under
reverse repurchase agreements from $1.9 billion at December 31, 1994 to $1.0
billion at December 31, 1995 to take advantage of favorable rates offered on
short-term FHLB advances throughout the year and to assume additional
deposits in the Branch Purchases.
FHLB Advances
The FHLB functions in a credit capacity for savings institutions and
certain other home financing institutions. A thrift institution may generally
borrow from its district FHLB through advances secured by its home mortgages
and other assets (principally securities which are obligations of, or
guaranteed by, the U.S. government). A thrift is required to hold a minimum
amount of capital stock of the FHLB based upon a percentage of its
outstanding home mortgage loans and similar obligations, a percentage of its
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<PAGE>
outstanding advances from the FHLB or a certain percentage of total assets.
Such advances may be made pursuant to several different credit programs made
available from time to time by the FHLB to meet seasonal and other
withdrawals of deposit accounts and to expand lending, each of which has its
own interest rate and range of maturities. The FHLB prescribes the acceptable
uses, as well as limitations on the size of such advances. Depending on the
program, such limitations are based either on a fixed percentage of the
institution's net worth or on the FHLB's assessment of the institution's
creditworthiness.
During 1995, the Bank prepaid $250 million in FHLB advances resulting in a
$2 million extraordinary gain on the early extinguishment of debt, net of
tax. During 1994, First Nationwide prepaid $92.5 million in FHLB advances
resulting in an extraordinary gain on the early extinguishment of debt, net
of tax, of approximately $1.4 million.
Interest Rate Swap Agreements
First Nationwide has used interest rate swap agreements to reduce its
interest rate risk exposure on fixed rate FHLB advances. Interest rate swap
agreements with a notional principal amount of $1.15 billion existed at
December 31, 1995. The notional amount does not represent amounts exchanged
by the parties and thus, is not a measure of First Nationwide's exposure. The
Bank pays the variable rate and receives the fixed rate based on LIBOR under
these agreements. The differential between these two amounts may change
significantly in the future due to fluctuations in market interest rates.
In order to reduce possible counterparty nonperformance risk, First
Nationwide has entered into interest rate swap agreements only with national
investment banking firms and the FHLB of San Francisco.
Old FNB Debentures
As part of the FN Acquisition, First Nationwide assumed subordinated
debentures, which bear interest at 10% per annum and mature on October 1,
2006 (the "Old FNB Debentures"). At December 31, 1995, the aggregate
principal amount of the Old FNB Debentures outstanding was $92.1 million.
Events of Default under the indenture governing the Old FNB Debentures
(the "Old FNB Indenture") include, among other things: (i) a default in the
payment of interest when due and such default continues for 30 days, (ii) a
default in the payment any principal when due, (iii) the failure to comply
with covenants in the Old FNB Indenture, provided that the trustee or holders
of at least 25% in principal amount of the outstanding Old FNB Debentures
notify the Bank of the default and the Bank does not cure the default within
60 days after receipt of such notice, (iv) certain events of bankruptcy,
insolvency or reorganization of the Bank, (v) the FSLIC/RF (or a comparable
entity) is appointed to act as conservator, liquidator, receiver or other
legal custodian for the Bank and (vi) a default under other indebtedness of
the Bank in excess of $10 million resulting in such indebtedness becoming due
and payable, and such default or acceleration has not been rescinded or
annulled within 60 days after the date on which written notice of such
failure has been given by the trustee to the Bank or by holders of at least
25% in principal amount of the outstanding Old FNB Debentures to the Bank and
the trustee.
SFFed Notes
As part of the SFFed Acquisition the Bank assumed the SFFed Notes, which
bear interest at 11.20% per annum and mature on September 1, 2004. In
connection with the assumption of the SFFed Notes, the Bank and all of the
holders of the SFFed Notes entered into an agreement amending certain
provisions of the note purchase pursuant to which the SFFed Notes were sold
(as amended, the "Note Purchase Agreement"). At December 31, 1995, the
aggregate principal amount of the SFFed Notes outstanding was $50 million.
Events of Default under the Note Purchase Agreement include, among other
things: (i) failure to make any payment of principal when due; (ii) any
failure to make any payment of interest when due and such payment is not made
within 15 days after the date such payment was due; (iii) failure to comply
with certain covenants in the Note Purchase Agreement, provided that such
failure continues for more than 60 days; (iv) failure to deliver to holders a
notice of default, notice of event of default, or notice of claimed default
as provided in the Note Purchase Agreement; (v) failure to comply with any
provision
100
<PAGE>
of the Note Purchase Agreement, provided that such failure continues for more
than 60 days after notice is delivered to SFFed; (vi) a default under other
indebtedness provided that the aggregate amount of all obligations in respect
of such indebtedness exceeds $15 million; (vii) one or more final,
non-appealable judgements outstanding against SFFed or its subsidiaries for
the payment of money aggregating in excess of $15 million, any one of which
has been outstanding for 45 days and shall not have been discharged in full
or stayed; (viii) any warranty, representation or other statement contained
in the Note Purchase Agreement by SFFed or any of its subsidiaries being
false or misleading in any material respect when made; or (ix) certain events
of bankruptcy, insolvency or reorganization of SFFed or its subsidiaries.
Consummation of the SFFed Acquisition constituted a "Change of Control"
under the Note Purchase Agreement. Although holders of the SFFed Notes had
the right to compel First Nationwide to redeem the SFFed Notes held by any
such holder at a redemption price of 100% of the principal amount thereof,
none of the holders of SFFed Notes exercised their redemption right.
Bank Preferred Stock
In connection with the FN Acquisition, the Bank issued 3,007,300 shares of
Bank Preferred Stock. The Bank Preferred Stock has a stated liquidation value
of $100 per share, plus declared and unpaid dividends, if any. Cash dividends
are noncumulative and are payable at an annual rate of 11-1/2% per share if,
when and as declared by the Board of Directors of the Bank.
The Bank Preferred Stock ranks prior to the common stock of the Bank and
to all other classes and series of equity securities subsequently issued,
other than any class or series expressly designated as being on a parity with
or senior to the Bank Preferred Stock as to dividends and liquidating
distributions.
The terms of the Bank Preferred Stock provide that the Bank may not
declare or pay any dividends or other distributions (other than in shares of
common stock of the Bank or other Junior Stock) with respect to any Junior
Stock or repurchase, redeem or otherwise acquire, or set apart funds for the
repurchase, redemption or other acquisition of, any Junior Stock (including
the common stock held by the Issuer) through a sinking fund or otherwise,
unless and until: (i) the Bank has paid full dividends on the Bank Preferred
Stock for the four most recent dividend periods, or funds have been paid over
to the dividend disbursing agent of the Bank for payment of such dividends,
and (ii) the Bank has declared a cash dividend on the Bank Preferred Stock at
the annual dividend rate for the current dividend period, and sufficient
funds have been paid over to the dividend disbursing agent of the Bank for
the payment of a cash dividend for such current dividend period. The Bank is
currently in compliance with both of such requirements.
Holders of the Bank Preferred Stock have no voting rights, except as
required by law or in certain limited circumstances.
Except in the event of a change of control, the Bank Preferred Stock is
not redeemable prior to September 1, 1999. The Bank Preferred Stock is
redeemable solely at the option of the Bank or its successor or any acquiring
or resulting entity with respect to the Bank (including by any parent or
subsidiary of the Bank, any such successor, or any such acquiring or
resulting entity), as applicable, at any time on and after September 1, 1999,
in whole or in part, at $105.75 per share on or after September 1, 1999 and
prior to September 1, 2000, and at prices decreasing pro rata annually
thereafter to the stated liquidation value of $100 per share on or after
September 1, 2004, plus declared and unpaid dividends, if any, without
interest. Upon a change of control, the Bank Preferred Stock is redeemable on
or prior to September 1, 1999 at the option of the Bank or its successor or
any acquiring or resulting entity with respect to the Bank (including by any
parent or subsidiary of the Bank, any such successor, or any such acquiring
or resulting entity), as applicable, in whole, but not in part, at a price
per share equal to: (i) $100, plus (ii) an amount equal to declared and
unpaid dividends, if any, to the date fixed for redemption, without interest,
and without duplication, an additional amount equal to the amount of
dividends that would be payable on the Bank Preferred Stock in respect of the
period from the first day of the dividend period in which the date fixed for
redemption occurs to the date fixed for redemption (assuming all such
dividends were to be declared), plus (iii) a specified make whole premium.
101
<PAGE>
SFFed Borrowings
Borrowings assumed in connection with the SFFed Acquisition consisted of
the following, at December 31, 1995 (in millions):
<TABLE>
<CAPTION>
<S> <C>
Federal funds purchased ........................ $ 4
Securities sold under agreements to repurchase 713
FHLB advances .................................. 275
SFFed Notes .................................... 49
--------
$1,041
========
</TABLE>
The weighted average rate on such borrowings at December 31, 1995 was
6.60%.
OTHER ACTIVITIES
The Put Agreement
In connection with FN Acquisition, Granite and the Bank entered into the
Put Agreement. Pursuant to the Put Agreement, the Bank has the right, on a
quarterly basis (the "Put Option"), to require Granite to purchase certain
commercial real estate loans, commercial real estate loans serviced by others
and residential mortgage loans with an original principal balance greater
than $250,000, and to take certain actions to protect the Bank from losses
with respect to certain Letters of Credit ("LOC") transactions, in each case,
only if such asset was purchased by the Bank from Old FNB pursuant to the
Asset Purchase Agreement. The Put Option will expire upon the earlier of: (i)
November 30, 1996, or (ii) such time as the sum of (x) the total amount paid
by Granite to the Bank in connection with all purchases or other payments
made by Granite pursuant to the Put Agreement and (y) the aggregate purchase
price paid by Granite to Old FNB in connection with purchases made prior to
the closing date ("Closing Date") pursuant to the Mortgage Loan Sale
Agreement dated as of November 30, 1993 (the "Mortgage Loan Sale Agreement"),
between Granite and Old FNB, less the total amount paid by the Bank to
Granite in connection with purchases made by the Bank through exercise of
certain buyback rights, equals $500 million (the "Maximum Amount"). The Bank
may not require Granite to purchase more than $100 million of residential
mortgage loans. Granite's obligations under the Put Agreement are guaranteed
by Ford Motor.
The Put Option is generally triggered in the event that any of the assets
subject to the Put Agreement become non-performing assets (i.e., payments of
interest or principal become 90 days or more contractually past due) at any
time prior to the expiration of the Put Option.
The purchase price to be paid by Granite for each mortgage loan purchased
pursuant to the Put Agreement is the sum of: (i) the outstanding principal
balance of the loan, (ii) any accrued but unpaid interest on the loan shown
on the Bank's books (not to exceed 90 days accrued but unpaid interest),
(iii) amounts owed to the Bank for real property taxes, insurance premiums
and similar charges and (iv) reasonable amounts (including reasonable
attorneys' fees and protective advances) expended by the Bank in protecting
its security interest or enforcing its rights with respect to such loan. The
amount to be paid by Granite to the Bank with respect to each non-performing
LOC for which the Bank requires such payment will be the amount of any
protective advances (the "Protective Advances") made by the Bank in
connection with such LOC (but in no event shall the Protective Advances
include an amount greater than 90 days accrued but unpaid interest). In
addition, with respect to any such LOC which has been included in the FNMA
Pool (as defined in the Put Agreement), Granite must, if so requested by the
Bank, take all necessary or appropriate steps to cause such LOC to be removed
from the FNMA Pool and thereafter Granite will bear all economic risk
associated with such LOC (or, if all required consents for such removal can
not be obtained, Granite must take such actions as are necessary to place the
Bank in the same economic position as it would have been in had the LOC been
so removed). With respect to certain other non-performing LOCs (including
LOCs that were originally part of the FNMA Pool but were required by FNMA to
be removed from such pool prior to the time such LOCs became non-performing),
Granite must, if requested by the Bank, post substitute collateral for the
benefit of the
102
<PAGE>
Bank, in the form of cash or cash equivalents with a value not less than the
face amount of the LOC, or in any other form deemed reasonably acceptable by
the Bank, in the place of any existing LOC collateral. The total amount
charged against the Maximum Amount with respect to any LOC will be the amount
of Protective Advances reimbursed by Granite, together with (x) in the case
of LOCs removed from the FNMA Pool, to the extent not included as part of the
reimbursed Protective Advances, the amounts set forth in clauses (i)-(iv) of
the first sentence of this paragraph with respect to the mortgage loan
underlying the LOC, or (y) in the case of LOCs for which a substitution of
collateral must be made, the face amount of the LOC.
If the Bank declines on any quarterly put date to sell an eligible
non-performing mortgage loan or to demand the removal or substitution of
collateral, as appropriate, in connection with an eligible LOC, its right to
put such asset or demand such removal or substitution, as the case may be,
shall be extinguished, except that put rights with respect to: (i) jumbo
residential loans, the Bank's interest in certain commercial mortgage loans
serviced by others and certain other loans formerly owned by FNMA will be
extended for one additional quarter, and (ii) loans which have matured as of
the Closing Date for which monthly principal and interest payments are being
made as of the Closing Date will be extended until the end of the second
quarter following the Closing Date. In the event that, as of November 30,
1996, Granite has not been required to purchase $500 million of
non-performing assets, the Bank may require Granite to purchase any Putable
Assets of the Bank, other than assets which previously became non-performing
and which the Bank did not require Granite to purchase, up to the Maximum
Amount.
The Assistance Agreement
Under the terms of the Assistance Agreement, the FSLIC's successor, the
FSLIC/RF, provides capital loss coverage and a guaranteed yield on the
Covered Assets, as well as indemnification in connection with certain claims.
In 1995, the FSLIC/RF purchased substantially all of the remaining Covered
Assets at the fair market value of such assets in the FDIC Purchase. Under
the terms of the Capital Loss Coverage (as defined herein) provisions of the
Assistance Agreement, losses sustained by First Nationwide from the FDIC
Purchase were reimbursed by the FSLIC/RF. There was no material impact on the
Consolidated Financial Statements of the Issuer as a result of the FDIC
Purchase.
The Bank's Covered Assets at the dates indicated are summarized by type as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1994
------ ------
(IN MILLIONS)
<S> <C> <C>
Loans ....................................... $-- $210
Investments in and advances to subsidiaries -- 7
Real estate owned ........................... -- 129
Other ....................................... 39 4
----- - ------
Total Covered Assets ...................... 39 350
FSLIC rebate reserve ........................ -- (38)
------ ------
Covered Assets, net ....................... $39 $312
====== ======
</TABLE>
At December 31, 1995, the Covered Asset balance of $39 million represents
amounts which remain unpaid by the FDIC for the Bank's second quarter 1995
billing. The FDIC has elected to treat this amount as a Covered Asset,
earning Guaranteed Yield (as defined herein), until payment is made by the
FDIC to the Bank.
The tax-exempt assistance received by First Nationwide from the FSLIC/RF
included the following provisions:
Guaranteed Yield. The guaranteed yield for a Covered Asset for any quarter
is the product of the Covered Asset's average book value for such quarter and
a yield which is based on the TCOF, the annualized quarterly average cost of
funds for Texas-based SAIF-insured savings institutions as reported
103
<PAGE>
by the OTS plus a specified basis point spread ("Guaranteed Yield"). At
December 31, 1995, the applicable TCOF was 5.63% and the applicable spread
was 190 basis points, resulting in a Guaranteed Yield of 7.53%.
Capital Loss Coverage. The FSLIC/RF mitigated First Nationwide's exposure
to capital losses on Covered Assets by providing for the reimbursement of
capital losses resulting from the liquidation of Covered Assets at less than
their book value ("Capital Loss Coverage").
Covered Asset Recovery. When the liquidation of a Covered Asset results in
a recovery in excess of the asset's original book value, the Assistance
Agreement requires that 90% of such recovery be remitted to the FSLIC/RF, or
offset against payments due to First Nationwide from the FSLIC/RF ("Covered
Asset Recovery").
Shared Gain. First Nationwide was entitled to a disposition fee on any
Covered Asset liquidated prior to the termination of coverage for net
proceeds in excess of 50% of its original book value.
Indemnification. The Assistance Agreement provides for indemnification of
losses suffered on specific assets acquired by First Nationwide that were not
Covered Assets under the Assistance Agreement. Items payable to First
Nationwide consist primarily of indemnification of amounts paid in settlement
of certain litigation and reimbursement of specific types of legal costs and
expenses.
FSLIC/RF Reimbursement. First Nationwide agreed to make a payment to the
FSLIC/RF over the ten-year term of the Assistance Agreement in lieu of a
tax-sharing agreement. Such tax benefit payment is implemented on a current
basis, without regard to the actual amount or timing of any such tax benefits
received, through a credit to the FSLIC/RF of 10% of the gross assistance the
FSLIC/RF pays to First Nationwide. This amount, net of 10% of all Covered
Asset Recoveries and Shared Gains, is known as the "FSLIC/RF Reimbursement."
In addition, the FSLIC/RF is entitled to a 10% share of tax benefits
attributable to the use of net operating loss carryovers of the Texas Closed
Banks in reducing the regular tax liability of the affiliated group of which
First Nationwide is a member. The sharing of tax benefits attributable to the
use of these net operating loss carryovers, however, occurs only when the net
operating loss carryovers are actually used.
Coverage Period. The FSLIC/RF assistance with respect to the Covered
Assets on First Nationwide's books at December 31, 1995 will expire from
coverage on December 27, 1998, unless the parties mutually agree to terminate
the Assistance Agreement at an earlier date.
Settlement of Amounts Due. After each calendar quarter, the FSLIC/RF is
required to pay to First Nationwide the net amount of all payments due under
the terms of the Assistance Agreement. The FSLIC/RF has the option either to
pay in cash or to treat as a Covered Asset (for purposes of determining the
Guaranteed Yield on all Covered Assets) the amount due to First Nationwide.
In connection with a modification to the Assistance Agreement in January
1992, First Nationwide was paid $45 million. Of such $45 million payment, $41
million, the amount net of certain claims, was included in the Bank's income.
Also, in connection with the modification, First Nationwide accrued the
present value of the estimated liability at December 31, 1992 to the FSLIC/RF
for FSLIC/RF Reimbursement over the life of the Assistance Agreement,
resulting in a $60 million charge to operations in 1992. This liability was
fully utilized in 1995 as a result of the FDIC Purchase.
FNMA Letters of Credit
On September 28, 1994, First Nationwide entered into an agreement with
FNMA pursuant to which FNMA provided credit enhancements for certain
bond-financed real estate projects originated by Old FNB. The agreement
requires that First Nationwide pledge to FNMA collateral in the form of
certain eligible securities which are held by a third party trustee. The
collateral requirement varies based on the balance of the bonds outstanding,
losses incurred (if any), as well as other factors. At December 31, 1995,
First Nationwide had pledged as collateral certain securities available for
sale and short-term investment securities with a carrying value of $98.6
million.
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<PAGE>
FGB Realty Advisors, Inc.
FGB Realty, a wholly owned subsidiary of First Nationwide, provides asset
management, disposition and advisory services to institutional owners of real
estate. FGB Realty has performed asset management and disposition services
for a variety of properties which range in product type from single family
homes to complex mixed use developments. Since its formation in 1991, FGB
Realty has become one of the largest full service asset management and
disposition firms in the United States, having managed portfolios in excess
of $7.5 billion. Fee revenues from unaffiliated parties were $14.0 million,
$14.1 million and $8.0 million for the years ended December 31, 1995, 1994
and 1993, respectively. These revenues are included in management fees in the
Issuer's respective consolidated statements of operations. At December 31,
1995 and 1994, respectively, First Nationwide and FGB Realty managed
principally non-performing loan and asset portfolios totalling $1.3 billion
and $1.6 billion, respectively, for investors.
At December 31, 1995, FGB Realty was responsible for the asset management
and disposition of over 4,500 assets, representing $862 million in commercial
and residential real estate loans located in markets throughout the nation.
FGB Realty has full service offices in Dallas, New York, Tulsa, Phoenix, San
Francisco and Los Angeles.
FN Investment Center
FN Investment Center ("FNIC"), an indirect wholly owned subsidiary of
First Nationwide which was acquired as part of the FN Acquisition, offers
securities and insurance products to both existing and prospective customers
of First Nationwide. FNIC is subject to the guidelines established by the OTS
for broker-dealer subsidiaries of savings associations, and is a member of
the National Association of Securities Dealers. In addition, FNIC is
registered as a broker-dealer with the SEC and the Securities Investor
Protection Corporation. FNIC receives commission revenue for acting as a
broker-dealer on behalf of its customers, but FNIC does not maintain customer
accounts or take possession of customer securities. Commission revenues of
$8.5 million and $2.0 million for the years ended December 31, 1995 and 1994,
respectively, are included in fees and service charges in the Issuer's
consolidated statement of operations for such years.
DIVIDEND POLICY OF FIRST NATIONWIDE
The dividend policy of the Bank complies with applicable legal and
regulatory restrictions. Before declaring any dividend, the directors of the
Bank consider the following factors: (i) the quality and stability of the
Bank's net income, (ii) the availability of liquid assets to make dividend
payments, (iii) the level of earnings retention as it impacts the Bank's
capital needs and projected growth and funding levels, both internal and
external, and (iv) the adequacy of capital after the payment of a dividend.
Under the Bank's dividend policy, a dividend will not be declared or paid
which would: (i) cause the capital level of the Bank to be reduced below
fully phased-in levels, or (ii), together with any other dividends declared
during the same calendar year, exceed 100% of the net income to the date for
that calendar year plus 50% of the Bank's surplus capital (that is, in excess
of fully phased-in requirements) at the beginning of that calendar year, so
long as the Bank is a Tier 1 association (as defined herein).
The Issuer expects that a substantial portion of any net earnings
generated by the Bank, including net earnings generated as a result of sales
of assets or deposits, that are not needed to pay dividends on the Bank
Preferred Stock or in its operations or to expand its business will, subject
to the foregoing restrictions, be distributed to the Issuer, its parent
company.
EMPLOYEES
At December 31, 1995 First Nationwide and its subsidiaries had
approximately 3,600 employees, consistent with the number of employees at
December 31, 1994. Although the number of employees has remained
substantially the same between the two years, there has been a significant
decrease in the number of employees located in California, offset by
additional employees in Maryland as a result of the Maryland Acquisition and
the transfer of the mortgage servicing operations to Maryland. None of First
Nationwide's employees are represented by any collective bargaining group and
management considers
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its relations with its employees to be good. First Nationwide maintains a
comprehensive employee benefits program providing, among other benefits,
health and welfare benefits, long and short-term disability insurance, and
life insurance. Additionally, First Nationwide offers employees a defined
contribution investment plan which is a qualified plan under Section 401(a)
of the Internal Revenue Code.
The Bank has undertaken a project to identify opportunities for reducing
operating costs and enhancing the efficiency of its operations. Management
has identified certain employees whose positions will be eliminated over the
next twelve months. These positions span all areas and business units of the
Bank. An initial liability for termination benefits totalling $4 million was
established in connection with this plan, and is included in the Issuer's
consolidated statement of operations for the year ended December 31, 1995.
The Issuer has no employees.
COMPETITION
First Nationwide experiences significant competition in both attracting
and retaining deposits and in originating real estate and consumer loans.
First Nationwide competes with other thrift institutions, commercial
banks, insurance companies, credit unions, thrift and loan associations,
money market mutual funds and brokerage firms in attracting and retaining
deposits. Competition for deposits from large commercial banks is
particularly strong. Many of the nation's thrift institutions and many large
commercial banks have a significant number of branch offices in the areas in
which First Nationwide operates.
In addition, there is strong competition in originating and purchasing
real estate and consumer loans, principally from other savings and loan
associations, commercial banks, mortgage banking companies, insurance
companies, consumer finance companies, pension funds and commercial finance
companies. The primary factors in competing for loans are the quality and
extent of service to borrowers and brokers, economic factors such as interest
rates, interest rate caps, rate adjustment provisions, loan maturities, LTV
ratios, loan fees, and the amount of time it takes to process a loan from
receipt of the loan application to date of funding. First Nationwide's future
performance will depend on its ability to originate a sufficient volume of
mortgage loans in its local market areas and through its wholesale network
and, if it is unable to originate a sufficient volume of mortgage loans, to
purchase a sufficient quantity of high-quality mortgage-backed securities
with adequate yields.
PROPERTIES
The Issuer neither owns nor leases any properties directly. The executive
offices of First Nationwide are located at 14651 Dallas Parkway, Suite 200,
Dallas, TX 75240, and its telephone number is (214) 770-3700. First
Nationwide leases approximately 41,000 square feet of space in the building
in which its executive offices are located under a lease expiring in 1999.
First Nationwide maintains additional office space at 135 Main Street, San
Francisco, California, 94105, consisting of approximately 99,000 square feet.
First Nationwide leases the building in which its additional office space is
located under a ten-year lease expiring in 2001. In addition, the Bank leases
approximately 288,000 square feet in a multiple-building administrative
facility in West Sacramento, California under a ten-year lease expiring in
2001. In connection with the move of FNMC's servicing operation to Maryland,
one and one-half of these four Sacramento buildings containing approximately
108,000 square feet were vacated. Management is currently screening potential
sub-lessees. At December 31, 1995, First Nationwide operated a total of 160
retail branches, and maintained one vacant branch facility which was
consolidated as a result of the Sonoma Purchase. Of those, 83 were owned and
78 were leased. Some of these retail branches are multi-purpose facilities,
housing loan production and administrative facilities as well. In addition to
the branch locations, at December 31, 1995 there are 27 separate loan
production offices, all of which are leased and eight of which were vacant,
and 14 separate administrative facilities (two owned and 12 leased). The
administrative facilities include a 220,000 square foot building owned in
Frederick, Maryland, which houses FNMC's mortgage loan servicing operation. A
state-by-state breakdown of all retail branches, administrative facilities
and loan production offices of First Nationwide at December 31, 1995 is shown
in the following table.
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<TABLE>
<CAPTION>
ADMINISTRATIVE LOAN PRODUCTION
BRANCHES FACILITIES FACILITIES
--------------------- --------------------- ---------------------
OWNED LEASED OWNED LEASED OWNED LEASED
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Arizona ......... -- -- -- 1 -- 2
California ...... 17 38 -- 3 -- 11
Florida ......... 6 18 -- 1 -- 2
Georgia ......... -- -- -- -- -- 1
Illinois ........ -- -- -- 2 -- 2
Maryland ........ -- -- 1 -- -- 1
Michigan* ....... 18 3 -- 1 -- 1
Minnesota ....... -- -- -- -- -- 1
Montana ......... -- -- -- 1 -- --
New Jersey* ..... 3 1 -- -- -- --
New York* ....... 18 8 -- 1 -- --
Ohio* ........... 18 10 1 -- -- --
Oklahoma ........ -- -- -- 1 -- --
Oregon .......... -- -- -- -- -- 1
Pennsylvania ... -- -- -- -- -- 1
Texas ........... 3 -- -- 1 -- 2
Washington ...... -- -- -- -- -- 2
--------- ---------- --------- ---------- --------- ----------
Total ......... 83 78 2 12 -- 27
========= ========== ========= ========== ========= ==========
</TABLE>
- ------------
* Certain properties in these states are under contract as of December
31, 1995 to be sold as part of the Branch Sales. See
"--General--Background."
In April 1995, FNMC closed substantially all of its retail mortgage loan
production offices. Costs associated with such closure approximated $2
million and are included in noninterest expense in the Issuer's 1995
consolidated statement of operations. On a continuing basis, First Nationwide
evaluates the adequacy of its office premises. As a result, surplus office
facilities may be sold or subleased to maintain cost-effective operations and
minimize vacant facilities. The 27 loan production offices at December 31,
1995 include eight offices housing operations acquired in the LMUSA 1995
Purchase, eleven offices housing wholesale lending operations, and eight
vacant facilities. Of the eight vacant loan production offices, one has been
subleased and management is currently screening tenants for the remaining
seven.
LEGAL PROCEEDINGS
The Asset Purchase Agreement provides that the purchase price thereunder
will be increased or decreased by, among other items, the increase or
decrease, as the case may be, from January 1, 1994 to September 30, 1994, in
the net book value of the purchased assets acquired from Old FNB (the
"Purchased Assets") and the liabilities assumed from Old FNB (the "Assumed
Liabilities") as such net book value is reflected on the books and records of
Old FNB in accordance with GAAP (as defined in the Asset Purchase Agreement)
consistently applied with the previous accounting practices of Old FNB. The
purchase price paid at closing, including that portion based upon the change
in net book value from January 1, 1994 to the close of business on September
30, 1994, was an estimate provided by Old FNB. First Nationwide prepared a
closing date balance sheet and a statement of the change in net book value of
the Purchased Assets and Assumed Liabilities from January 1, 1994 to
September 30, 1994 ("Closing Adjustment Documents"). The parties mutually
agreed upon all but two of the issues raised as a result of the Closing
Adjustment Documents.
The more significant of the two issues in dispute arises from Old FNB's
change in net book value from January 1, 1994, to the close of business on
September 30, 1994. In arriving at the cash purchase price, Old FNB added
back to the book value of the Purchased Assets an amount of approximately $24
million
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which had been amortized from intangible assets and goodwill on the closing
date, thereby increasing the net book value of the Purchased Assets and
Assumed Liabilities and the estimated cash purchase price by $24 million.
First Nationwide believes that the exclusion of the amortization of
intangible assets and goodwill from the closing net book value is contrary to
the express provisions of the Asset Purchase Agreement. As a result, First
Nationwide does not believe that the addition by Old FNB of $24 million to
the cash purchase price was proper under the terms of the Asset Purchase
Agreement. On March 9, 1995, First Nationwide filed suit against Old FNB in
state district court in Dallas, Texas regarding this matter. On October 16,
1995, the court in this matter granted Old FNB's motion to compel arbitration
and stayed First Nationwide's court action. The arbitration hearing was held
from April 22, 1996 to April 25, 1996. The arbitrator ordered post-hearing
briefs to be filed on May 15, 1996. Although management of First Nationwide
believes that it will prevail on this issue, in the event that First
Nationwide does not so prevail, the result would not be material to the
consolidated financial statements of the Issuer or First Nationwide.
The other remaining issue in dispute arising out of the Closing Adjustment
Documents relates to an outstanding receivable account, which the Bank
maintains was overstated by approximately $4 million by Old FNB at September
30, 1994. Resolution of this issue remains outstanding. Although management
of the Bank believes that it will prevail on this issue, in the event that it
does not do so, the result would not be material to the consolidated
financial statements of the Issuer or First Nationwide.
First Nationwide is involved in legal proceedings incidental to the normal
conduct of its business. Although it is impossible to predict the outcome of
any outstanding legal proceedings, management believes that such legal
proceedings and claims, individually or in the aggregate, will not have a
material effect on the financial condition or results of operations of the
Issuer or First Nationwide.
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REGULATION
GENERAL
The Issuer is a savings and loan holding company within the meaning of the
HOLA and, as such, is registered with the OTS and is subject to comprehensive
OTS regulation. The Bank is a federally chartered and insured stock savings
bank subject to extensive regulation and supervision by the OTS, as the
primary federal regulator of savings associations, and the FDIC, as the
administrator of the SAIF.
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings associations and savings
and loan holding companies. The following description of statutory and
regulatory provisions and proposals, which is not intended to be a complete
description of these provisions or their effects on the Issuer or the Bank,
is qualified in its entirety by reference to the particular statutory or
regulatory provisions or proposals.
REGULATION OF SAVINGS AND LOAN HOLDING COMPANIES
Holding Company Acquisitions
The Issuer is a registered savings and loan holding company. The HOLA and
OTS regulations generally prohibit a savings and loan holding company,
without prior OTS approval, from acquiring, directly or indirectly, the
ownership or control of any other savings association or savings and loan
holding company, or all, or substantially all, of the assets or more than 5%
of the voting shares thereof. These provisions also prohibit, among other
things, any director or officer of a savings and loan holding company, or any
individual who owns or controls more than 25% of the voting shares of such
holding company, from acquiring control of any savings association not a
subsidiary of such savings and loan holding company, unless the acquisition
is approved by the OTS.
Holding Company Activities
The Issuer currently operates as a unitary savings and loan holding
company. Generally, there are limited restrictions on the activities of a
unitary savings and loan holding company and its non-savings association
subsidiaries. If the Issuer ceases to be a unitary savings and loan holding
company, the activities of the Issuer and its non-savings association
subsidiaries would thereafter be subject to substantial restrictions.
The HOLA requires every savings association subsidiary of a savings and
loan holding company to give the OTS at least 30 days' advance notice of any
proposed dividends to be made on its guarantee, permanent or other
non-withdrawable stock, or else such dividend will be invalid.
Affiliate Restrictions
Transactions between a savings association and its "affiliates" are
subject to quantitative and qualitative restrictions under Sections 23A and
23B of the Federal Reserve Act. Affiliates of a savings association include,
among other entities, the savings association's holding company and companies
that are under common control with the savings association.
In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a savings association or its subsidiaries
may engage in certain "covered transactions" with affiliates to an amount
equal to 10% of the association's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates.
In addition, a savings association and its subsidiaries may engage in covered
transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to
the savings association or its subsidiary, as those prevailing at the time
for comparable transactions with nonaffiliated companies. A "covered
transaction" is defined to include a loan or extension of credit to an
affiliate; a purchase of investment securities issued by affiliate; a
purchase of assets from an affiliate, with certain exceptions; the acceptance
of securities issued by an affiliate as collateral for a loan or extension of
credit to any party; or the issuance of a guarantee, acceptance or letter of
credit on behalf of an affiliate.
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In addition, under the OTS regulations, a savings association may not make
a loan or extension of credit to an affiliate unless the affiliate is engaged
only in activities permissible for bank holding companies; a savings
association may not purchase or invest in securities of an affiliate other
than shares of a subsidiary; a savings association and its subsidiaries may
not purchase a low-quality asset from an affiliate; and covered transactions
and certain other transactions between a savings association or its
subsidiaries and an affiliate must be on terms and conditions that are
consistent with safe and sound banking practices. With certain exceptions,
each loan or extension of credit by a savings association to an affiliate
must be secured by collateral with a market value ranging from 100% to 130%
(depending on the type of collateral) of the amount of the loan or extension
of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as
affiliates, except to the extent that the OTS or the Board of Governors of
the Federal Reserve System (the "FRB") decides to treat such subsidiaries as
affiliates. The regulation also requires savings associations to make and
retain records that reflect affiliate transactions in reasonable detail, and
provides that certain classes of savings associations may be required to give
the OTS prior notice of affiliate transactions.
REGULATION OF FEDERAL SAVINGS BANKS
Regulatory System
As a federally insured savings bank, lending activities and other
investments of the Bank must comply with various statutory and regulatory
requirements. The Bank is regularly examined by the OTS and must file
periodic reports concerning its activities and financial condition.
Although the OTS is the Bank's primary regulator, the FDIC has "backup
enforcement authority" over the Bank. The Bank's eligible deposit accounts
are insured by the FDIC under the SAIF, up to applicable limits.
Federal Home Loan Banks
The Bank is a member of the FHLBS. Among other benefits, FHLB membership
provides the Bank with a central credit facility. The Bank is required to own
capital stock in an FHLB in an amount equal to the greater of: (i) 1% of its
aggregate outstanding principal amount of its residential mortgage loans,
home purchase contracts and similar obligations at the beginning of each
calendar year, (ii) .3% of total assets, or (iii) 5% of its FHLB advances
(borrowings).
Liquid Assets
Under OTS regulations, for each calendar month, a savings bank is required
to maintain an average daily balance of liquid assets (including cash,
certain time deposits and savings accounts, bankers' acceptances, certain
government obligations and certain other investments) not less than a
specified percentage of the average daily balance of its net withdrawable
accounts plus short-term borrowings (its liquidity base) during the preceding
calendar month. This liquidity requirement, which is currently at 5.0%, may
be changed from time to time by the OTS to any amount between 4.0% to 10.0%,
depending upon certain factors. OTS regulations also require each savings
association to maintain an average daily balance of short-term liquid assets
equal to not less than 1.0% of the average daily balance of its net
withdrawable accounts and short-term borrowings during the preceding calendar
month. The Bank maintains liquid assets in compliance with these regulations.
Regulatory Capital Requirements
OTS capital regulations require savings banks to satisfy minimum capital
standards: risk-based capital requirements, a leverage requirement and a
tangible capital requirement. Savings banks must meet each of these standards
in order to be deemed in compliance with OTS capital requirements. In
addition, the OTS may require a savings association to maintain capital above
the minimum capital levels.
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All savings banks are required to meet a minimum risk-based capital
requirement of total capital (core capital plus supplementary capital) equal
to 8% of risk-weighted assets (which includes the credit risk equivalents of
certain off-balance sheet items). In calculating total capital for purposes
of the risk-based requirement, supplementary capital may not exceed 100% of
core capital. Under the leverage requirement, a savings bank is required to
maintain core capital equal to a minimum of 3% of adjusted total assets. (In
addition, under the prompt corrective action provisions of the OTS
regulations, all but the most highly-rated institutions must maintain a
minimum leverage ratio of 4% in order to be adequately capitalized. See
"--Prompt Corrective Action.") A savings bank is also required to maintain
tangible capital in an amount at least equal to 1.5% of its adjusted total
assets.
Under OTS regulations, a savings bank with a greater than "normal" level
of interest rate exposure must deduct an interest rate risk ("IRR") component
in calculating its total capital for purposes of determining whether it meets
its risk-based capital requirement. Interest rate exposure is measured,
generally, as the decline in an institution's net portfolio value that would
result from a 200 basis point increase or decrease in market interest rates
(whichever would result in lower net portfolio value), divided by the
estimated economic value of the savings association's assets. The interest
rate risk component to be deducted from total capital is equal to one-half of
the difference between an institution's measured exposure and "normal" IRR
exposure (which is defined as 2%), multiplied by the estimated economic value
of the institution's assets. Based on internal measures of interest rate risk
at December 31, 1995, the Bank would not be required to deduct an IRR
component in calculating total risk-based capital.
The Bank's total capital to risk-based assets ratio was 11.34%, its core
capital to risk-based assets ratio was 9.14%, its leverage capital ratio was
5.84% and its tangible capital ratio was 5.84% at December 31, 1995. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Capital Resources." In connection with the acquisition of the
Texas Closed Banks, the Bank was granted a forbearance from several
regulations for up to ten years from December 28, 1988. Generally, the
forbearance is from regulatory action against violations that might otherwise
arise from the nature of the government assisted acquisition of the Texas
Closed Banks, such as limitations on investment in service corporations,
investing in forward commitments, equity risk investments, loans to one
borrower, investments in buildings and qualified thrift lender status.
Although certain forbearances may have been affected by the passage of
subsequent legislation, management believes that the forbearance granted in
this case remains in full force and effect. The Bank does not rely on the
forbearance for purposes of complying with its regulatory capital
requirements.
Under regulations of the OTS, the following factors may cause the OTS to
require a particular savings association to maintain higher capital than
otherwise would be required under the capital regulations: (1) concentration
of credit risk, (2) certain risks arising from non-traditional activities,
and (3) management failure to adequately monitor and control risks presented
by concentrations of credits and non-traditional activities.
Certain Consequences of Failure to Comply with Regulatory Capital
Requirements
A savings bank's failure to maintain capital at or above the minimum
capital requirements may be deemed an unsafe and unsound practice and may
subject the savings bank to enforcement actions and other proceedings. Any
savings bank not in compliance with all of its capital requirements is
required to submit a capital plan that addresses the bank's need for
additional capital and meets certain additional requirements. While the
capital plan is being reviewed by the OTS, the savings bank must certify,
among other things, that it will not, without the approval of its appropriate
OTS Regional Director, grow beyond net interest credited or make capital
distributions. If a savings bank's capital plan is not approved, the bank
will become subject to additional growth and other restrictions. In addition,
the OTS, through a capital directive or otherwise, may restrict the ability
of a savings bank not in compliance with the capital requirements to pay
dividends and compensation, and may require such a bank to take one or more
of certain corrective actions, including, without limitation: (i) increasing
its capital to specified levels, (ii) reducing the rate of interest that may
be paid on savings accounts, (iii) limiting receipt of deposits to those made
to existing accounts, (iv) ceasing issuance of new accounts of any or all
classes or categories except in exchange for existing accounts, (v) ceasing
or limiting the purchase of loans or the making of other specified
investments, and (vi) limiting operational expenditures to specified levels.
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The HOLA permits savings banks not in compliance with the OTS capital
standards to seek an exemption from certain penalties or sanctions for
noncompliance. Such an exemption will be granted only if certain strict
requirements are met, and must be denied under certain circumstances. If an
exemption is granted by the OTS, the savings bank still may be subject to
enforcement actions for other violations of law or unsafe or unsound
practices or conditions.
Prompt Corrective Action
The prompt corrective action regulation of the OTS, promulgated under
FDICIA, requires certain mandatory actions and authorizes certain other
discretionary actions to be taken by the OTS against a savings bank that
falls within certain undercapitalized capital categories specified in the
regulation.
The regulation establishes five categories of capital classification:
"well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." Under
the regulation, the ratio of total capital to risk-weighted assets, core
capital to risk-weighted assets and the leverage ratio are used to determine
an institution's capital classification. At December 31, 1995, the Bank met
the capital requirements of a "well capitalized" institution under applicable
OTS regulations.
In general, the prompt corrective action regulation prohibits an insured
depository institution from declaring any dividends, making any other capital
distribution, or paying a management fee to a controlling person if,
following the distribution or payment, the institution would be within any of
the three undercapitalized categories. In addition, adequately capitalized
institutions may accept brokered deposits only with a waiver from the FDIC,
while undercapitalized institutions may not accept, renew or roll-over
Brokered Deposits.
Institutions that are classified as undercapitalized are subject to
certain mandatory supervisory actions, including: (i) increased monitoring by
the appropriate federal banking agency for the institution and periodic
review of the institution's efforts to restore its capital, (ii) a
requirement that the institution submit a capital restoration plan acceptable
to the appropriate federal banking agency and implement that plan, and that
each company having control of the institution guarantee compliance with the
capital restoration plan in an amount not exceeding the lesser of 5% of the
institution's total assets at the time it received notice of being
undercapitalized, or the amount necessary to bring the institution into
compliance with applicable capital standards at the time it fails to comply
with the plan, and (iii) a limitation on the institution's ability to make
any acquisition, open any new branch offices, or engage in any new line of
business without the prior approval of the appropriate federal banking agency
for the institution or the FDIC.
The regulation also provides that the OTS may take any of certain
additional supervisory actions against an undercapitalized institution if the
agency determines that such actions are necessary to resolve the problems of
the institution at the least possible long-term cost to the deposit insurance
fund. These supervisory actions include: (i) requiring the institution to
raise additional capital or be acquired by another institution or holding
company if certain grounds exist, (ii) restricting transactions between the
institution and its affiliates, (iii) restricting interest rates paid by the
institution on deposits, (iv) restricting the institution's asset growth or
requiring the institution to reduce its assets, (v) requiring replacement of
senior executive officers and directors, (vi) requiring the institution to
alter or terminate any activity deemed to pose excessive risk to the
institution, (vii) prohibiting capital distributions by bank holding
companies without prior approval by the FRB, (viii) requiring the institution
to divest certain subsidiaries, or requiring the institution's holding
company to divest the institution or certain affiliates of the institution,
and (ix) taking any other supervisory action that the agency believes would
better carry out the purposes of the prompt corrective action provisions of
FDICIA.
Institutions classified as undercapitalized that fail to submit a timely,
acceptable capital restoration plan or fail to implement such a plan are
subject to the same supervisory actions as significantly undercapitalized
institutions. Significantly undercapitalized institutions are subject to the
mandatory provisions applicable to undercapitalized institutions. The
regulation also makes mandatory for significantly undercapitalized
institutions certain of the supervisory actions that are discretionary for
institutions classified as undercapitalized, creates a presumption in favor
of certain discretionary supervisory actions,
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and subjects significantly undercapitalized institutions to additional
restrictions, including a prohibition on paying bonuses or raises to senior
executive officers without the prior written approval of the appropriate
federal bank regulatory agency. In addition, significantly undercapitalized
institutions may be subjected to certain of the restrictions applicable to
critically undercapitalized institutions.
The regulation requires that an institution be placed into conservatorship
or receivership within 90 days after it becomes critically undercapitalized,
unless the OTS, with concurrence of the FDIC, determines that other action
would better achieve the purposes of the prompt corrective action provisions
of FDICIA. Any such determination must be renewed every 90 days. A depository
institution also must be placed into receivership if the institution
continues to be critically undercapitalized on average during the fourth
quarter after the institution initially became critically undercapitalized,
unless the institution's federal bank regulatory agency, with concurrence of
the FDIC, makes certain positive determinations with respect to the
institution.
Critically undercapitalized institutions are also subject to the
restrictions generally applicable to significantly undercapitalized
institutions and to a number of other severe restrictions. For example,
beginning 60 days after becoming critically undercapitalized, such
institutions may not pay principal or interest on subordinated debt without
the prior approval of the FDIC. (However, the regulation does not prevent
unpaid interest from accruing on subordinated debt under the terms of the
debt instrument, to the extent otherwise permitted by law.) In addition,
critically undercapitalized institutions may be prohibited from engaging in a
number of activities, including entering into certain transactions or paying
interest above a certain rate on new or renewed liabilities.
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
reclassify it as adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions; and, if the institution is
undercapitalized, require it to comply with certain restrictions applicable
to significantly undercapitalized institutions.
Conservatorship/Receivership
In addition to the grounds discussed under "--Prompt Corrective Action,"
the OTS (and, under certain circumstances, the FDIC) may appoint a
conservator or receiver for a savings association if any one or more of a
number of circumstances exist, including, without limitation, the following:
(i) the institution's assets are less than its obligations to creditors and
others, (ii) a substantial dissipation of assets or earnings due to any
violation of law or any unsafe or unsound practice, (iii) an unsafe or
unsound condition to transact business, (iv) a willful violation of a final
cease-and-desist order, (v) the concealment of the institution's books,
papers, records or assets or refusal to submit such items for inspection to
any examiner or lawful agent of the appropriate federal banking agency or
state bank or savings association supervisor, (vi) the institution is likely
to be unable to pay its obligations or meet its depositors' demands in the
normal course of business, (vii) the institution has incurred, or is likely
to incur, losses that will deplete all or substantially all of its capital,
and there is no reasonable prospect for the institution to become adequately
capitalized without federal assistance, (viii) any violation of law or unsafe
or unsound practice that is likely to cause insolvency or substantial
dissipation of assets or earnings, weaken the institution's condition, or
otherwise seriously prejudice the interests of the institution's depositors
or the federal deposit insurance fund, (ix) the institution is
undercapitalized and the institution has no reasonable prospect of becoming
adequately capitalized, fails to become adequately capitalized when required
to do so, fails to submit a timely and acceptable capital restoration plan,
or materially fails to implement an accepted capital restoration plan, (x)
the institution is critically undercapitalized or otherwise has substantially
insufficient capital, or (xi) the institution is found guilty of certain
criminal offenses related to money laundering.
Liability of Commonly Controlled Depository Institutions
In general, savings associations and other depository institutions can be
held liable for any loss which the FDIC incurs or reasonably anticipates
incurring in connection with either the default of a commonly
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controlled depository institution or any assistance provided by the FDIC to a
commonly controlled institution in danger of default. A depository
institution is required to pay the amount of such liability upon receipt of
written notice from the FDIC unless such written notice is received more than
two years from the date the FDIC incurred the loss. Liability for the losses
of commonly controlled institutions can lead to the failure of all depository
institutions in a holding company structure if the remaining institutions are
unable to pay the liability assessed by the FDIC.
In general, for purposes of this provision, depository institutions are
deemed to be "commonly controlled" if they are controlled by the same holding
company or if one depository institution is controlled by another; "default"
of a depository institution occurs when there is an official determination
pursuant to which a conservator, receiver or other legal custodian is
appointed for the institution; and a depository institution is deemed to be
"in danger of default" where its federal or state supervisory agency
determines that the institution is not likely to be able to meet the demands
of its depositors or pay its obligations in the normal course of business and
there is no reasonable prospect that it will be able to do so, or determines
that the institution has incurred or is likely to incur losses that will
deplete substantially all of its capital and there is no reasonable prospect
that the institution's capital can be replenished without federal assistance.
The Bank is not currently under common control with any other depository
institution.
Enforcement Powers
The OTS and, under certain circumstances, the FDIC, have substantial
enforcement authority with respect to savings associations, including
authority to bring various enforcement actions against a savings association
and any of its "institution-affiliated parties" (a term defined to include,
among other persons, directors, officers, employees controlling stockholders,
agents and shareholders who participate in the conduct of the affairs of the
institution). This enforcement authority includes, without limitation: (i)
the ability to terminate a savings association's deposit insurance, (ii)
institute cease-and-desist proceedings, (iii) bring suspension, removal,
prohibition and criminal proceedings against institution-affiliated parties,
and (iv) assess substantial civil money penalties. As part of a
cease-and-desist order, the agencies may require a savings association or an
institution-affiliated party to take affirmative action to correct conditions
resulting from that party's actions, including to make restitution or provide
reimbursement, indemnification or guarantee against loss; restrict the growth
of the institution; and rescind agreements and contracts.
Capital Distribution Regulation
In addition to the prompt corrective action restriction on paying
dividends, OTS regulations limit certain "capital distributions" by
OTS-regulated savings associations. Capital distributions are defined to
include, in part, dividends and payments for stock repurchases and cash-out
mergers.
Under the regulation, an association that meets its fully phased-in
capital requirements both before and after a proposed distribution and has
not been notified by the OTS that it is in need of more than normal
supervision (a "Tier 1 association") may, after prior notice to but without
the approval of the OTS, make capital distributions during a calendar year up
to the higher of: (i) 100% of its net income to date during the calendar year
plus the amount that would reduce by one-half its surplus capital ratio at
the beginning of the calendar year, or (ii) 75% of its net income over the
most recent four-quarter period. A Tier 1 association may make capital
distributions in excess of the above amount if it gives notice to the OTS and
the OTS does not object to the distribution. A savings association that meets
its regulatory capital requirements both before and after a proposed
distribution but does not meet its fully phased-in capital requirement (a
"Tier 2 association") is authorized, after prior notice to the OTS but
without OTS approval, to make capital distributions in an amount up to 75% of
its net income over the most recent four-quarter period, taking into account
all prior distributions during the same period. Any distribution in excess of
this amount must be approved in advance by the OTS. A savings association
that does not meet its current regulatory capital requirements (a "Tier 3
association") cannot make any capital distribution without prior approval
from the OTS, unless the capital distribution is consistent with the terms of
a capital plan approved by the OTS.
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<PAGE>
At December 31, 1995, the Bank qualifies as a Tier 1 association for
purposes of the capital distribution rule. The OTS may prohibit a proposed
capital distribution that would otherwise be permitted if the OTS determines
that the distribution would constitute an unsafe or unsound practice. The
requirements of the capital distribution regulation supersede less stringent
capital distribution restrictions in earlier agreements or conditions.
The OTS has proposed to amend its capital distribution regulation to
conform its requirements to the OTS prompt corrective action regulation.
Under the proposed regulation, an institution that would remain at least
adequately capitalized after making a capital distribution, and that was
owned by a holding company, would be required to provide notice to the OTS
prior to making a capital distribution. "Troubled" associations and
undercapitalized associations would be allowed to make capital distributions
only by filing an application and receiving OTS approval, and such
applications would be approved under certain limited circumstances.
Qualified Thrift Lender Test
In general, savings associations are required to maintain at least 65% of
their portfolio assets in certain qualified thrift investments (which consist
primarily of loans and other investments related to residential real estate
and certain other assets). A savings association that fails the qualified
thrift lender test is subject to substantial restrictions on activities and
to other significant penalties. At December 31, 1995, approximately 90.34% of
the Bank's portfolio assets were qualified thrift investments.
FDIC Assessments
The deposits of the Bank are insured by the SAIF of the FDIC, up to
applicable limits, and are subject to deposit premium assessments by the
SAIF. Under the FDIC's risk-based insurance system, SAIF-assessed deposits
are currently subject to premiums of between 23 and 31 cents per $100 of
deposits, depending upon the institution's capital position and other
supervisory factors. The rate applicable to the Bank is currently 23 cents
per $100 of deposits.
The FDIC recently amended its assessment regulations to lower the deposit
premiums for some banking institutions which are members of the BIF of the
FDIC. Under the FDIC's risk-based insurance system, BIF-assessed deposits are
currently subject to premiums of between 0 to 27 cents per $100 of deposits
as a result of these amendments. In reducing these BIF rates, the FDIC did
not change the rates applicable to SAIF-assessable deposits.
Proposed budget reconciliation legislation that contains provisions to
capitalize the SAIF has been passed by Congress. The President has vetoed
this budget reconciliation bill. Such veto, however, was based on issues
unrelated to the provisions dealing with capitalization of the SAIF. The
legislation includes provisions for a special assessment, as determined by
the FDIC, on SAIF-assessable deposits of insured depository institutions in
an amount adequate to cause the SAIF to achieve a specified designated
reserve ratio. Under the proposed legislation, the assessment would have been
due January 1, 1996. The FDIC has publicly estimated that the amount of the
special assessment needed to recapitalize the SAIF ranges between 85 to 90
basis points.
The legislation provides that the assessment would be applied to SAIF
deposits held as of March 31, 1995. The SAIF-assessable deposits of the Bank
as of this date, adjusted for the Branch Sales, the Branch Purchases, the
SFFed Acquisition and the Home Federal Acquisition, totalled approximately
$8.9 billion. If the assessment is made at a rate within the estimated range
of 85 to 90 basis points, after giving effect to the SFFed Acquisition, the
Branch Sales, the Home Federal Acquisition and the Branch Purchases, the
effect on the Bank would be a pre-tax charge in the range of $75 to $80
million ($68 to $72 million on an after-tax basis). It is expected that in
the event that the SAIF is recapitalized pursuant to this legislation, the
assessment rates applicable to SAIF-assessable deposits will be reduced
substantially from the Bank's current rate of 23 cents. The proposed
legislation includes additional provisions that, among other things, would
require BIF member institutions to share pro rata in the obligations of SAIF
members for certain obligations issued by the Financing Corporation, a
corporation established by the federal government in 1987 to finance the
recapitalization of FSLIC. The Issuer is unable to predict whether this, or
similar, legislation will be enacted.
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<PAGE>
Congress is considering other legislative proposals to merge the SAIF and
the BIF and to merge the charters for federal savings associations and
commercial banks. Such legislation, if enacted, could have a material effect
on the operations of the Bank and the Issuer. The Issuer is unable to predict
whether, or in what form, such legislation would be enacted.
Non-Investment Grade Debt Securities
Savings associations and their subsidiaries are prohibited from acquiring
or retaining any corporate debt security that, at the time of acquisition, is
not rated in one of the four highest rating categories by at least one
nationally recognized statistical rating organization. The Bank does not own
any non- investment grade debt securities.
Community Reinvestment Act and the Fair Lending Laws
Savings associations have a responsibility under CRA and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal
Credit Opportunity Act and the Fair Housing Act (together, the "Fair Lending
Laws") prohibit lenders from discriminating in their lending practices on the
basis of characteristics specified in those statutes. An institution's
failure to comply with the provisions of CRA could, as a minimum, result in
regulatory restrictions on its activities, and failure to comply with the
Fair Lending Laws could result in enforcement actions by the OTS, as well as
other federal regulatory agencies and the Department of Justice.
New Safety and Soundness Guidelines
The OTS and the other federal banking agencies have established guidelines
for safety and soundness, addressing operational and managerial, as well as
compensation matters for insured financial institutions. Institutions failing
to meet these standards are required to submit compliance plans to their
appropriate federal regulators. The OTS and the other agencies have also
issued for comment proposed guidelines regarding asset quality and earnings
standards for insured institutions.
Change of Control
Subject to certain limited exceptions, no company can acquire control of a
savings association without the prior approval of the OTS, and no individual
may acquire control of a savings association if the OTS objects. Any company
that acquires control of a savings association becomes a savings and loan
holding company subject to extensive registration, examination and regulation
by the OTS. Conclusive control exists, among other ways, when an acquiring
party acquires more than 25% of any class of voting stock of a savings
association or savings and loan holding company, or controls in any manner
the election of a majority of the directors of the company. In addition, a
rebuttable presumption of control exists if, among other things, a person
acquires more than 10% of any class of a savings association or savings and
loan holding company's voting stock (or 25% of any class of stock) and, in
either case, any of certain additional control factors exist.
TAXATION OF THE BANK
For a discussion of proposed tax legislation that would change the Bank's
method of accounting for bad debts, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Provision for Federal and
State Income Taxes."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Issuer
The following table sets forth certain information (ages as of April 1,
1996) concerning the directors and executive officers of the Issuer. All
directors serve terms of one year or until the election of their respective
successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------- ----- -------------------------------------
<S> <C> <C>
Ronald O. Perelman 53 Chairman of the Board, Chief
Executive Officer and Director
Howard Gittis ...... 62 Vice Chairman and Director
Irwin Engelman ..... 61 Executive Vice President and Chief
Financial Officer
Barry F. Schwartz . 46 Executive Vice President and General
Counsel
Laurence Winoker .. 39 Vice President and Controller
</TABLE>
The Bank
The following table sets forth certain information (ages as of April 1,
1996) concerning the directors and executive officers of the Bank. All
directors serve terms of one year or until election of their respective
successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- ----- -----------------------------------------
<S> <C> <C>
Ronald O. Perelman ....... 53 Director
Gerald J. Ford ........... 51 Chairman of the Board, Chief Executive
Officer and Director
Carl B. Webb ............. 46 President, Chief Operating Officer and
Director
Paul M. Bass, Jr. ........ 60 Director
George W. Bramblett, Jr. 55 Director
Bob Bullock .............. 66 Director
Irwin Engelman ........... 61 Director
Howard Gittis ............ 62 Director
Gabrielle K. McDonald ... 53 Director
Robert Setrakian ......... 72 Director
Christie S. Flanagan .... 57 Executive Vice President and General
Counsel
Kendall M. Fugate ........ 58 Executive Vice President and Information
and Technology Services Director
Roger L. Gordon .......... 54 Executive Vice President
Richard P. Hodge ......... 41 Executive Vice President and Corporate
Tax Director
Walter C. Klein, Jr. .... 52 Executive Vice President; President, FNMC
Lacy G. Newman, Jr. ..... 46 Executive Vice President and Chief Credit
Officer
James R. Staff ........... 48 Executive Vice President and Chief
Financial Advisor
Richard H. Terzian ....... 59 Executive Vice President and Chief
Financial Officer
Peter K. Thomsen ......... 54 Executive Vice President and Retail
Banking Director
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<PAGE>
NAME AGE POSITION
- ------------------------- ----- -----------------------------------------
Michael R. Walker ........ 50 Executive Vice President--Commercial Real
Estate
Renee N. Tucei ........... 39 Senior Vice President and Controller
</TABLE>
Mr. Perelman has been Chairman of the Board of the Issuer since its
formation in 1994 and a Director of First Nationwide since 1994. Mr. Perelman
has been Chairman of the Board and Chief Executive Officer of MacAndrews &
Forbes for more than the past five years. Mr. Perelman also is Chairman of
the Board of Andrews Group Incorporated ("Andrews Group"), Consolidated Cigar
Corporation ("Consolidated Cigar"), Mafco Consolidated Group Inc. ("Mafco
Consolidated"), Mafco Worldwide Corporation ("Mafco Worldwide"), Marvel
Entertainment Group, Inc. ("Marvel"), Meridian Sports Incorporated ("Meridian
Sports"), New World Communications Group Incorporated ("New World"), New
World Television Incorporated ("New World Television"), Power Control
Technologies Inc. ("PCT") and Toy Biz, Inc. ("Toy Biz") and is the Chairman
of the Executive Committee of the Board of Directors of Revlon, Inc.
("Revlon") and Revlon Consumer Products Corporation ("Revlon Products"). Mr.
Perelman is a Director of the following corporations which file reports
pursuant to the Exchange Act: Andrews Group, The Coleman Company, Inc.
("Coleman"), Coleman Holdings Inc., Coleman Worldwide Corporation ("Coleman
Worldwide"), Consolidated Cigar, First Nationwide, Mafco Consolidated, Mafco
Worldwide, Marvel, Marvel Holdings Inc. ("Marvel Holdings"), Marvel (Parent)
Holdings Inc., ("Marvel Parent"), Marvel III Holdings Inc. ("Marvel III"),
Meridian Sports, New World, New World Television, NWCG Holdings Corporation
("NWCG Holdings"), Revlon, Revlon Products, Revlon Worldwide Corporation
("Revlon Worldwide") and Toy Biz.
Mr. Gittis has been Vice Chairman and a Director of the Issuer and a
Director of First Nationwide since 1994. Mr. Gittis has been Vice Chairman
and Director of MacAndrews & Forbes and various of its affiliates since 1985.
Mr. Gittis is a Director of Andrews Group, Jones Apparel Group, Inc., Loral
Corporation, Revlon, Revlon Worldwide, Revlon Products, Mafco Consolidated,
Mafco Worldwide, Consolidated Cigar, New World, New World Television, NWCG
Holdings and PCT.
Mr. Engelman has been Executive Vice President and Chief Financial Officer
of the Issuer since its formation in 1994, and a Director of First Nationwide
since 1993. He has been Executive Vice President and Chief Financial Officer
of MacAndrews & Forbes and various of its affiliates since February 1992. He
was Executive Vice President and Chief Financial Officer of GAF Corporation
from 1990 to 1991; Director, President and Chief Operating Officer of
Citytrust Bancorp Inc. from 1988 to 1990; Executive Vice President of the
Blackstone Group LP from 1987 to 1988; and Director and Executive Vice
President of General Foods Corporation for more than five years prior to
1987. Mr. Engelman is a Director of New World, New World Television and
Revlon Products.
Mr. Schwartz has been Executive Vice President and General Counsel of the
Issuer since January 1996. He has been Executive Vice President and General
Counsel of MacAndrews & Forbes and various of its affiliates since 1993. Mr.
Schwartz was Senior Vice President of MacAndrews & Forbes from 1989 to 1993.
Mr. Winoker has been Vice President and Controller of the Issuer since
1994. He has been Vice President and Controller of MacAndrews & Forbes and
various of its affiliates since September 1992. Mr. Winoker was Assistant
Vice President and Assistant Controller of MacAndrews & Forbes and various of
its affiliates for more than five years prior to September 1992.
Mr. Ford has been Chairman of the Board, Chief Executive Officer and a
Director of First Nationwide since consummation of the FN Acquisition. Mr.
Ford was Chairman of the Board and a Director of First Madison from 1993 to
1994. Mr. Ford previously served as Chairman of the Board, Chief Executive
Officer and a Director of First Gibraltar from 1988 through 1993. Mr. Ford
served as the Chairman of the Board, Chief Executive Officer and a Director
of First United Bank Group, Inc. ("First United Bank Group"), from 1993
through 1994. Mr. Ford is Chairman of the Board and a Director of Millennium
Mortgage Corporation. Mr. Ford is Chairman of the Board and a Director of FGB
Services, Inc. and Madison Realty Advisors, Inc. ("Madison Realty"). Mr. Ford
has also served in the following
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<PAGE>
capacities over the past five years: Chairman of the Board, Chief Executive
Officer and Director, Ford Bank Group, Inc. ("Ford Bank Group"); Chairman of
the Board, Chief Executive Officer and Director, United New Mexico Financial
Corporation. Mr. Ford is also a Director of Norwest Corporation and ACS.
Mr. Webb has been the President, Chief Operating Officer and a Director of
First Nationwide since the consummation of the FN Acquisition. Mr. Webb
served as President, Chief Executive Officer and Director of First Madison
from 1993 through 1994. Mr. Webb previously served as President, Chief
Operating Officer and a Director of First Gibraltar from 1988 through 1993.
Mr. Webb also serves as a Director of FNMC, a wholly owned subsidiary of
First Nationwide.
Mr. Bass has been a Director of First Nationwide since May, 1993. Mr. Bass
is currently the Vice Chairman and Director of First Southwest Company. Mr.
Bass is a Director and Chairman of the Audit Committee of Keystone
Consolidated Industries, and is a Director of Source Services, Inc. Mr. Bass
has served in the following capacities during the past five years: Director,
Endevco, Inc.; Director, Ford Bank Group; and Chairman of the Board and
Director, Pizza Inn, Inc.
Mr. Bramblett has been a Director of First Nationwide since May, 1993. Mr.
Bramblett has been associated with the law firm of Haynes & Boone since 1973
and is currently a Partner and a member of the Executive Committee of that
firm. Mr. Bramblett has served in the following capacities during the past
five years: Member of the Texas Higher Education Coordinating Board of the
Texas College and University System and Trustee of the Baylor College of
Dentistry.
Mr. Bullock has served as a Director of First Nationwide since 1994. Mr.
Bullock has been Lieutenant Governor of the State of Texas since 1990. Mr.
Bullock is Chairman of the Board, Director and President of JFB-RDB, Inc. Mr.
Bullock served as a Director of the Ford Bank Group from 1992 to 1993, and as
Director of the First United Bank Group from 1992 to 1993. Prior to 1990, Mr.
Bullock served as the State of Texas Comptroller of Public Accounts. Mr.
Bullock has been Of Counsel to the law firm of Scott, Douglass, Luton and
McConnico, L.L.P. since 1992.
Ms. McDonald has served as a Director of First Nationwide since January,
1991. Ms. McDonald also served as a Director of FGB-San Antonio in 1992. Ms.
McDonald currently serves as a Judge on the International Criminal Tribunal
for the former Yugoslavia. Ms. McDonald is also currently a Professor of Law
at the Thurgood Marshall School of Law of Texas Southern University. Ms.
McDonald currently serves as a director of Freeport McMoRan Inc., McMoRan Oil
& Gas Co. and Freeport McMoRan Copper & Gold Inc. Ms. McDonald was Of Counsel
to the Walker & Satterthwaite firm from 1991 to 1993. She was a partner in
the law firm of Matthews & Branscomb from 1988 through 1991. Prior to that
time, Ms. McDonald served as a United States District Court Judge for the
Southern District of Texas.
Mr. Setrakian has been a Director of First Nationwide since November 1994.
Mr. Setrakian previously served as a Director of Old FNB for more than 10
years. Mr. Setrakian is presently the Chairman and President of the William
Saroyan Foundation and the Chairman and President of Mid-State Horticultural
Company. He is also a former Chairman and member of the Board of Governors of
the United States Postal Service; former Commissioner of the Federal Maritime
Commission; former Chairman and Chief Executive Officer of the California
Growers Winery, Inc.; and former Chairman and founder of the National Bank of
Agriculture.
Mr. Flanagan has been the Executive Vice President and General Counsel of
First Nationwide since the consummation of the FN Acquisition. He also serves
as a Director of FNMC. Mr. Flanagan has been associated with the law firm of
Jenkens & Gilchrist, P.C. and its predecessors since 1968 in various
capacities, including Managing Partner, and he is currently Of Counsel to
that firm.
Mr. Fugate has been an Executive Vice President of First Nationwide since
the consummation of the FN Acquisition. Mr. Fugate previously served as
Executive Vice President of Old FNB from 1991 to 1994, and held various
executive positions with Citibank, N.A. and Citibank California, FSB from
1982 to 1991.
Mr. Gordon has been an Executive Vice President of First Nationwide since
February 1996. Mr. Gordon previously was associated with SFFed for more than
five years prior to February 1996, including most recently as Chairman,
President and Chief Executive Officer.
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<PAGE>
Mr. Hodge has been an Executive Vice President of First Nationwide since
January 1996 and has been employed by First Nationwide since November 1995.
Mr. Hodge previously was associated with the public accounting firm of KPMG
Peat Marwick LLP and its predecessors since 1981, including most recently as
a tax partner since 1986.
Mr. Klein has been an Executive Vice President of First Nationwide and the
President of FNMC since January 1996. He also serves as a Director of FNMC.
Mr. Klein previously was associated with PNC Mortgage Corp. of America and
its predecessor, Sears Mortgage Corporation, since 1986, including most
recently as Chairman and Chief Executive Officer.
Mr. Newman has been Executive Vice President and Chief Credit Officer of
First Nationwide since the consummation of the FN Acquisition. Mr. Newman has
also served as President and a Director of FGB Realty and Madison Realty
since 1992. During 1991, Mr. Newman was a Senior Vice President of J.E.
Robert Companies. He served as a Senior Vice President of Bank of New England
Corporation from 1990 to 1991, and served as the President, Chief Executive
Officer and Director of the Seamen's Bank for Savings from 1989 to 1990.
Mr. Staff has been an Executive Vice President of First Nationwide since
October 17, 1994. He also serves as a Director of FNMC. Mr. Staff previously
was associated with the public accounting firm of KPMG Peat Marwick LLP and
its predecessors since 1979, including most recently as Partner-in-charge of
Financial Services for the Southwest-Dallas area.
Mr. Terzian has served as Executive Vice President and Chief Financial
Officer of First Nationwide since April 1, 1995. For the five years prior to
that date, Mr. Terzian served as Chief Financial Officer of Dime Bancorp,
Inc. (The Dime Savings Bank of New York, FSB).
Mr. Thomsen has been an Executive Vice President of First Nationwide since
the consummation of the FN Acquisition. Mr. Thomsen previously served as
Senior Executive Vice President of Old FNB and a Director from 1992 to 1994.
Mr. Thomsen was an Executive Vice President of Old FN from 1991 to 1992. Mr.
Thomsen had been Executive Vice President of Michigan National Corporation
from 1986 to 1991 and a Director from 1989 to 1991, and the President of
Michigan National Bank from 1988 to 1991 and a Director from 1989 to 1991.
Mr. Thomsen was Chairman of Independence One Mortgage Corporation, a
subsidiary of Michigan National Bank, from 1986 to 1990.
Mr. Walker has been an Executive Vice President of First Nationwide since
the consummation of the FN Acquisition. Mr. Walker served as Senior Vice
President of First Madison from 1993 to 1994. Mr. Walker previously served as
Senior Vice President of First Gibraltar from 1988 to 1993.
Ms. Tucei has been a Senior Vice President and the Controller of First
Nationwide since the consummation of the FN Acquisition. Ms. Tucei previously
served as Senior Vice President and Controller of First Madison from 1993 to
1994. Ms. Tucei was Senior Vice President and Director of Regulatory
Assistance Compliance for First Gibraltar from 1991 to 1993, and served as
Senior Vice President and Manager of Regulatory Assistance Operations for
First Gibraltar from 1989 to 1991.
COMPENSATION OF DIRECTORS
Directors of the Issuer who are not officers or employees of the Issuer or
any of its affiliates receive $25,000 per year plus an additional $1,000 per
meeting. Directors of the Bank who do not receive compensation as officers or
employees of the Bank or any of its affiliates are paid a fee of $3,500 for
each meeting of the Board of Directors they attend and each director who
attends, in person, 67% or more of the regular meetings of the Board of
Directors during a fiscal year will receive an additional fee of $9,000.
Members of the Audit Committee of the Board of Directors of the Bank who do
not receive compensation as officers or employees of the Bank or any of its
affiliates are paid a fee of $1,500 for each meeting of the Audit Committee
they attend.
EXECUTIVE COMPENSATION
The Issuer is a holding company with no business operations of its own
and, accordingly, engages in its business through the Bank and its
subsidiaries. The officers of the Issuer receive no compensation for
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their services to the Issuer. Accordingly, the following table sets forth
certain compensation awarded to, earned by or paid to the Chief Executive
Officer of the Issuer's operating subsidiary, First Nationwide, and the four
most highly paid executive officers of First Nationwide, other than the Chief
Executive Officer, who served as executive officers of First Nationwide at
December 31, 1995 for services rendered in all capacities to the Issuer,
First Nationwide and its subsidiaries during the years ended December 31,
1995, 1994 and 1993.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------
OTHER ANNUAL ALL OTHER
COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) (2)
- --------------------------- ------ ------------ -------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Gerald J. Ford (3) 1995 $1,500,000 $ 0 $ 7,644 $49,511
Chairman & Chief 1994 317,358 0 912 4,500
Executive Officer
Carl B. Webb 1995 900,000 0 274,351 66,707
President & Chief 1994 361,724 0 154,496 9,000
Operating Officer 1993 269,551 80,000 8,493 12,658
Christie S. Flanagan (3) 1995 700,000 20,000 10,892 44,854
Executive Vice President & 1994 116,669 0 0 0
General Counsel
Lacy G. Newman, Jr. 1995 475,000 0 178,457 36,166
Executive Vice President & 1994 345,334 0 124,916 9,000
Chief Credit Officer 1993 300,000 77,200 6,289 11,572
James R. Staff (3) 1995 450,000 0 17,348 27,001
Executive Vice President & 1994 65,627 0 0 0
Chief Financial Advisor
</TABLE>
- ------------
(1) Includes: (i) the value of group term life insurance, (ii) amounts paid
under relocation programs for Messrs. Webb and Newman, (iii) the value
of the use of Bank-owned automobiles for Messrs. Webb, Flanagan, Newman
and Staff, (iv) club dues, (v) personal financial planning services
paid by the Bank for Messrs. Ford, Webb, Newman and Staff, and (vi)
security expenses paid by the Bank for Messrs. Newman and Staff.
(2) Includes: (i) the Bank's contributions to the 401(k) plan for Messrs.
Ford, Webb, Flanagan and Newman, (ii) the Bank's contribution to the
Supplemental Employees' Investment Plan, and (iii) premiums on
supplemental life insurance paid by the Bank for Messrs. Ford, Webb and
Flanagan.
(3) Mr. Ford became Chief Executive Officer of the Bank upon the
consummation of the FN Acquisition on October 3, 1994. Messrs. Flanagan
and Staff became Executive Vice Presidents on October 3 and October 17,
1994, respectively.
Certain executive officers of the Bank have entered into employment
agreements with First Nationwide. See "Certain Transactions--Executive
Employment Agreements." Also, Gerald J. Ford has been and is presently a
party to certain consulting, and similar agreements with the certain
affiliates of the Issuer, as more fully described in "Certain
Transactions--Transactions with Mr. Ford."
Effective October 1, 1995, the Issuer adopted a management incentive plan
(the "Incentive Plan") with respect to certain executive officers of the Bank
(the "Participants"). Awards under the Incentive Plan are made in the form of
performance units. Each performance unit entitles the Participants to receive
cash and/or stock options ("Bonuses") based on the Participant's vested
interest in a bonus pool.
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<PAGE>
Generally, the Incentive Plan provides for the payment of Bonuses, on a
quarterly basis, to the Participants upon the occurrence of certain events.
Bonuses vest at 20% per year beginning October 1, 1995. The aggregate amount
of Bonuses payable under the Incentive Plan is subject to a cap of $50
million. During 1995, a liability of $2 million was recorded relative to the
Incentive Plan.
The following table sets forth information concerning awards made during
1995 to each of the executive officers named in the preceding table under all
long-term incentive plans. There were no long-term incentive plan awards in
1994 or 1993.
LONG-TERM INCENTIVE PLAN AWARDS (1)
<TABLE>
<CAPTION>
NUMBER OF ESTIMATED FUTURE PAYOUTS UNDER
SHARES, PERFORMANCE OR NON-STOCK-PRICE-BASED PLANS
UNITS OR OTHER PERIOD UNTIL -------------------------------------------
OTHER MATURATION OR THRESHOLD ($) TARGET ($) MAXIMUM ($)
NAME RIGHTS (#) PAYOUT (2) (3) (3) (3)
- -------------------- ----------- ------------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Carl B. Webb ........ 500 Ten years $10,127,500 $10,127,500 $25,000,000
Christie S. Flanagan 80 Ten years 1,620,400 1,620,400 4,000,000
Lacy G. Newman, Jr. 80 Ten years 1,620,400 1,620,400 4,000,000
James R. Staff ...... 80 Ten years 1,620,400 1,620,400 4,000,000
</TABLE>
- ------------
(1) The table above represents awards of performance units pursuant to the
Incentive Plan. Any payout with respect to the performance units would
only be made by the Issuer. Units vest at 20% per year beginning on
October 1, 1995.
(2) Payouts of cash awards would be made only if earned and only (i) upon
achievement of a target "Excess Value" prior to December 31, 2004, (ii)
upon an occurrence of a change in control of the Issuer or the Bank,
(iii) upon an occurrence of a public offering of common stock of the
Issuer or the Bank or (iv) on December 31, 2004. "Excess Value" is a
measure of the Issuer's performance tied to the aggregate earnings of
the Issuer and the aggregate distributions made to the shareholders of
the Issuer.
(3) Generally, the cash payout with respect to a performance unit equals
.0084% of the Excess Value. Upon achievement of the target Excess
Value, the cash payout with respect to each performance unit would be
$20,255. If a payout is triggered otherwise than by achievement of the
target Excess Value, no cash payouts would be made unless the Excess
Value at the time of the event triggering payment exceeds or equals the
amount resulting in a payout of at least $20,255 with respect to each
performance unit. In certain circumstances, in case of a public
offering of common stock of the Issuer or the Bank, the payout would be
made, in whole or in part, in options to acquire common stock of the
Issuer or the Bank. The number of shares of stock that would be subject
to such options is not determinable at this time.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Issuer has no Compensation Committee. The following directors serve on
the Compensation Committee of the Board of First Nationwide: Gerald J. Ford,
Howard Gittis, Paul Bass and George Bramblett. During the 1995 and 1994
fiscal years, Mr. Ford was Chairman of the Board of First Nationwide. In
addition, Mr. Ford controls Hunter's Glen, which owns 100% of the class B
common stock of the Issuer representing 20% of the voting common stock
(representing approximately 15% of the voting power of its common stock) of
the Issuer. Mr. Gittis is a director of the Issuer and of the Bank.
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OWNERSHIP OF THE COMMON STOCK
Ronald O. Perelman, Chairman of the Board, Chief Executive Officer and a
director of the Issuer, 35 East 62nd Street, New York, New York 10021,
through MacAndrews & Forbes, beneficially owns 100% of the class A common
stock of the Issuer representing 80% of its voting common stock (representing
approximately 85% of the voting power of its common stock), and 100% of the
class C common stock of the Issuer. Hunter's Glen, a limited partnership
controlled by Gerald J. Ford, Chairman of the Board, Chief Executive Officer
and a director of the Bank, 200 Crescent Court, Suite 1350, Dallas, Texas
75201, owns 100% of the class B common stock of the Issuer, representing 20%
of its voting common stock (representing approximately 15% of the voting
power of its common stock). See "Certain Transactions."
CERTAIN TRANSACTIONS
RELATIONSHIP WITH MACANDREWS & FORBES
The Issuer is an 80% owned indirect subsidiary of MacAndrews & Forbes. As
a result, MacAndrews & Forbes is able to direct and control the policies of
the Issuer and its subsidiaries, including with respect to mergers, sales of
assets and similar transactions.
MacAndrews & Forbes is a diversified holding company with interests in
several industries. Through its 83% ownership of Revlon, MacAndrews & Forbes
is engaged in the cosmetics and skin care, fragrance and personal care
products business. MacAndrews & Forbes owns 83% of Coleman, which is engaged
in the manufacture and marketing of recreational outdoor products, portable
generators, power-washing equipment, spas and hot tubs and 65% of Meridian
Sports, a manufacturer and marketer of specialized boats and water sports
equipment. Marvel, a youth entertainment company, is 80% owned by MacAndrews
& Forbes. MacAndrews & Forbes also is engaged in the television broadcast and
programming production business through its approximate 40% ownership of New
World Communications, and through its 85% ownership of Mafco Consolidated, in
the processing of licorice and other flavors, and in the manufacture and
distribution of cigars and pipe tobacco. MacAndrews & Forbes is also in the
financial services business through the Bank. The principal executive offices
of MacAndrews & Forbes are located at 35 East 62nd Street, New York, New York
10021.
TAX SHARING AGREEMENT
For federal income tax purposes, the Issuer and First Nationwide are
included in the Mafco Group, and accordingly their federal taxable income and
loss will be included in the consolidated federal income tax return filed by
Mafco Holdings. The Issuer and First Nationwide also may be included in
certain state and local tax returns of Mafco Holdings or its subsidiaries.
First Nationwide, the Issuer and Mafco Holdings are parties to the Tax
Sharing Agreement, effective as of January 1, 1994, pursuant to which: (i)
First Nationwide will pay to the Issuer amounts equal to the taxes that First
Nationwide would be required to pay if it were to file a return separately
from the Mafco Group, and (ii) the Issuer will pay to Mafco Holdings amounts
equal to the taxes that the Issuer would be required to pay if it were to
file a consolidated return on behalf of itself and First Nationwide
separately from the Mafco Group. The Tax Sharing Agreement allows First
Nationwide to take into account, in determining its liability to the Issuer,
any net operating loss carryovers that it would have been entitled to utilize
if it had filed separate returns for each year since the formation of the
Bank. The Tax Sharing Agreement also allows the Issuer to take into account,
in determining its liability to Mafco Holdings, any net operating losses that
it would have been entitled to utilize if it had filed a consolidated return
on behalf of itself and the Bank for each year since the formation of the
Bank.
The Bank has generated significant federal income tax net operating losses
since its formation. This is due, in part, to the fact that under applicable
federal income tax law, the financial assistance received by the Bank
pursuant to the Assistance Agreement was excluded from the taxable income of
the Bank. In addition to such tax-free financial assistance, the Bank has
been entitled to its normal operating deductions, including interest expense
and certain losses relating to its loan portfolio. As a result, the Bank
generated significant net operating losses for federal income tax purposes
even though its operations were profitable. Furthermore, under the
reorganization provisions of the Code, the Bank succeeded to certain net
operating loss carryovers of the Texas Closed Banks.
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At December 31, 1995, if the Issuer had filed a consolidated tax return on
behalf of itself (as common parent) and the Bank for each year since the
formation of the Bank, it would have had approximately $2.6 billion of
regular net operating losses and approximately $992 million of AMT net
operating losses, both of which the Issuer would have been entitled to
utilize. A portion of such losses, to the extent not previously used to
offset income, would expire in the year 2002 and in each year thereafter and
would fully expire in 2007. It is expected that under the Tax Sharing
Agreement, First Nationwide and the Issuer will be able to eliminate a
significant portion of the amounts they otherwise would be required to pay to
the Issuer and Mafco Holdings, respectively, under the Tax Sharing Agreement
in respect of federal income tax and, accordingly, it is not expected that
First Nationwide or the Issuer will record a significant amount of federal
income tax expense as members of the Mafco Group. Payments made by the Issuer
under the Tax Sharing Agreement with the Mafco Group during the year ended
December 31, 1995 totalled $3.1 million. There were no such payments in 1994.
Under federal tax law, the Issuer and First Nationwide will be subject to
several liability with respect to the consolidated federal income tax
liabilities of the Mafco Group for any taxable period during which the Issuer
or First Nationwide are, as the case may be, a member of such group. Mafco
Holdings has agreed, however, to indemnify the Issuer and First Nationwide
for any such federal income tax liability (and certain state and local tax
liabilities) of Mafco Holdings or any of its subsidiaries (other than the
Issuer and First Nationwide) that the Issuer or First Nationwide is actually
required to pay. Therefore, the Tax Sharing Agreement will not increase the
amounts payable by the Issuer or First Nationwide over the amounts that they
would have had to pay if they were not members of the Mafco Group.
LOANS TO AFFILIATE
The Issuer loaned approximately $46.8 million to an affiliate on March 1,
1996. Such loan bears interest at the rate of 10.5% over the then prevailing
yield to maturity of the five-year United States treasury note, and is an
unsecured subordinated obligation of the borrower guaranteed by certain other
affiliates of the Issuer. Management believes that the terms and conditions
of such loan are at least as favorable to the Issuer as might have been
obtained in a similar transaction with an unaffiliated party.
TRANSACTIONS WITH MR. FORD
Madison Financial, Inc. ("Madison Financial"), a corporation formerly
owned by Gerald J. Ford, the Chairman of the Board, Chief Executive Officer
and a director of the Bank, was a party to a Consulting Agreement (the
"Consulting Agreement"), effective as of February 1, 1993, between Madison
Financial and Trans Network Insurance Services (formerly First Gibraltar
(Parent) Holdings Inc.) ("TNIS") pursuant to which Madison Financial provided
consulting services to TNIS for a term ending on December 31, 1998. The
Consulting Agreement was terminated in July 1994 in connection with the
Exchange Agreement (as defined herein). Certain costs related to the
Consulting Agreement were charged to the Issuer.
The Bank is an indirect subsidiary of First Gibraltar Holdings. In
connection with the offering of the Senior Notes, First Gibraltar Holdings
incorporated Holdings and a wholly owned subsidiary of Holdings, the Issuer,
to hold 100% of the common stock of the Bank. First Gibraltar Holdings
contributed all of its shares of capital stock of the Bank to Holdings, which
contributed such shares to the Issuer in exchange for 1,000 shares of common
stock of the Issuer. The Issuer amended its certificate of incorporation to
create 800 shares of class A common stock having one vote per share, 200
shares of class B common stock having .75 votes per share and 230.3 shares of
nonvoting class C common stock, and Holdings exchanged its 1,000 shares of
common stock for 800 shares of class A common stock. Pursuant to the terms of
an Exchange Agreement entered into between the Issuer, Mr. Ford and Holdings
(the "Exchange Agreement"), and in connection with the consummation of the FN
Acquisition, Holdings acquired 100% of the class C common stock of the
Issuer, in exchange for $210 million and Mr. Ford acquired 100% of the class
B common stock of the Issuer in exchange for his 6.25% of the class A common
stock of First Gibraltar Holdings and all of the shares of Madison Financial,
the sole asset of which was the Consulting Agreement. In addition, the Issuer
also assumed indebtedness of Mr. Ford in the amount of approximately $11.9
million to TNIS (the "Ford Obligation"), which obligation has been forgiven
by TNIS. As
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a result of the consummation of the transactions contemplated by the Exchange
Agreement, Mr. Ford owns 100% of the class B common stock of the Issuer,
representing 20% of its voting common stock (representing approximately 15%
of the voting power of its voting common stock) and Holdings owns 100% of the
class A common stock of the Issuer, representing 80% of its voting common
stock (representing approximately 85% of the voting power of its voting
common stock), and 100% of the class C common stock of the Issuer. The
Issuer, Holdings and Mr. Ford have entered into a stockholders agreement (the
"Stockholders Agreement") pursuant to which, among other things, Mr. Ford and
the Issuer have the right to transfer their respective shares to certain
affiliates. In addition, the Stockholders Agreement contains other customary
provisions regarding restrictions on transfer and registration rights. On
December 29, 1995, Mr. Ford transferred his shares of class B common stock to
Hunter's Glen, which assumed the obligations under, and will receive the
benefits of, the Stockholders Agreement.
Mr. Ford has entered into a loan agreement with NationsBank of Texas, N.A.
("NationsBank"), whereby NationsBank has loaned Mr. Ford $5 million. Such
loan has a maturity of up to one year and bears interest at a floating
interest rate based on LIBOR. The loan is secured by Mr. Ford's Senior Notes.
The terms of the loan provide that, in the event of default by Mr. Ford under
such loan or in the event of certain rapid and material declines in the value
of the Senior Notes pledged as collateral, NationsBank or any successor or
assignee thereof will have the right to foreclose on the pledged Senior Notes
and sell, or direct Mr. Ford to sell, such Senior Notes, to certain Qualified
Institutional Buyers ("QIBs") (as such term is defined in Rule 144A under the
Securities Act) pursuant to Rule 144A under the Securities Act, pursuant to
Regulation S under the Securities Act, to the Issuer or pursuant to a shelf
registration statement.
Mr. Ford has entered into an employment agreement with First Nationwide
calling for his continued employment by First Nationwide in his current
executive capacity with an annual base salary of $750,000. The term of this
agreement extends through December 31, 1997, and provides for, among other
things, a life insurance policy on the life of Mr. Ford in an amount equal to
three times his base salary.
Mr. Ford has also entered into a consulting agreement with First
Nationwide Management Corp. ("First Nationwide Management"), an affiliate of
the Issuer, providing for the payment to him of annual consulting fees of
$750,000 for 1995 and in increasing amounts through 1997, and certain other
related expenses. Pursuant to an arrangement between First Nationwide
Management and the Issuer, such consulting fees and other related expenses
paid by First Nationwide Management are charged to the Issuer. Such charges
amounted to approximately $964,000 and $155,000 in 1995 and 1994,
respectively.
EXECUTIVE EMPLOYMENT AGREEMENTS
In addition to the employment agreement between Mr. Ford and the Bank (see
"--Transactions with Mr. Ford"), Messrs. Webb, Flanagan, Staff, Newman and
Hodge have entered into employment agreements with First Nationwide calling
for their continued employment by First Nationwide in their current executive
capacities. All five agreements are substantially similar in their terms
except that Messrs. Webb, Staff and Newman's employment agreements terminate
on January 31, 1998, Mr. Hodge's terminates on December 31, 1998 and Mr.
Flanagan's terminates December 31, 1999 and Mr. Flanagan has been paid a
$20,000 "sign on" bonus. Additionally, each employment agreement provides for
a life insurance policy on the life of the insured in an amount double the
base salary payable by First Nationwide to such individual. Pursuant to such
employment agreements, the annual base salaries payable by First Nationwide
to Messrs. Webb, Flanagan, Staff, Newman and Hodge are $900,000, $700,000,
$450,000, $475,000 and $250,000, respectively.
Pursuant to an Agreement for Provision of Services between First
Nationwide and First Nationwide Management, dated December 1, 1994 (the
"Services Agreement"), a portion of the salaries payable by First Nationwide
to Messrs. Webb, Flanagan and Staff is charged to First Nationwide Management
so that the annual net base compensation payable by First Nationwide will be
$600,000, $350,000 and $225,000 for Messrs. Webb, Flanagan and Staff,
respectively. All of such fees paid by First Nationwide Management are
charged to the Issuer for services performed by these executives. The total
amounts of such fees were
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approximately $945,000 and $147,000 in 1995 and 1994, respectively, including
$945,000 and $78,000 received by the Bank pursuant to the Services Agreement,
which fees are included in the amounts allocated by First Nationwide
Management to the Issuer as described in the first paragraph under
"--Services Agreement."
The Bank has also entered into an employment agreement with Mr. Gordon,
effective as of the consummation of the SFFed Acquisition, for a term ending
on January 30, 1999. Pursuant to such employment agreement, the annual base
salary payable by the Bank to Mr. Gordon is $400,000. Mr. Gordon's agreement
also provides for life insurance in an amount on the life of the insured
equal to $714,000.
SERVICES AGREEMENTS
First Nationwide Management allocates certain of its expenditures to the
Issuer. Such expenditures relate to salary and benefits payable to selected
Bank employees (including Messrs. Webb, Flanagan and Staff), aviation and
other expenses. Pursuant to this arrangement, approximately $1,935,000 and
$459,000 was allocated by First Nationwide Management to the Issuer for the
years ended December 31, 1995 and 1994, respectively.
Effective December 1, 1994, the Bank entered into the Services Agreement
with First Nationwide Management whereby selected Bank employees (including
Messrs. Webb, Flanagan, and Staff) provided services for First Nationwide
Management and certain of its subsidiaries. Fees are paid to the Bank under
the Services Agreement at the rate of approximately $86,000 per month based
on actual services provided and approximated $1,092,000 and $86,000 for the
years ended December 31, 1995 and 1994, respectively. These costs are
included in the amounts allocated by First Nationwide Management to the
Issuer as described in the preceding paragraph.
Effective on June 1, 1995, the Bank entered into an agreement whereby it
provides marketing and other support services to TNIS in connection with the
insurance agency business it purchased from a Bank subsidiary on the same
date. Service charges under this agreement amount to approximately $43,000
per month. Management believes that the terms and conditions of these
arrangements are at least as favorable to the Bank as those which could be
obtained from similar arrangements with an unaffiliated party.
SALE OF BUSINESS TO TNIS
Effective on June 1, 1995, FNC Insurance Agency, Inc., a wholly owned
subsidiary of the Bank, sold that portion of its insurance agency business
related to marketing insurance products to the Bank's retail deposit and
consumer loan customers to TNIS for approximately $0.7 million. Management
believes that the terms and conditions of this transaction are at least as
favorable to the Issuer as might have been obtained in a similar transaction
with an unaffiliated party.
LOANS TO EXECUTIVE OFFICERS AND DIRECTORS
Some of the Bank's executive officers, directors, and members of their
immediate families have engaged in loan transactions with First Nationwide.
Such loans were made: (i) in the ordinary course of the Bank's business, (ii)
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions between the Bank and
other persons, and (iii) did not involve more than the normal risk of
collectibility or present other unfavorable features.
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DESCRIPTION OF THE SENIOR NOTES
In connection with the FN Acquisition, the Issuer issued $200 million of
Senior Notes, including $5.5 million to certain directors and officers of the
Bank. Deferred issuance costs of $9.6 million associated with the issuance of
the Senior Notes were recorded in other assets in the Issuer's 1994
consolidated statement of financial condition and are being amortized over
the term of the Senior Notes.
The Senior Notes are redeemable at the option of the Issuer, in whole or
in part, during the 12-month period beginning May 15, 1999, at a redemption
price of 106.125% plus accrued interest to the date of redemption, and
thereafter at 100% plus accrued interest. The Senior Notes are subordinated
to all existing and future liabilities of the Issuer's subsidiaries,
including deposits and other borrowings of the Bank, and to the Bank
Preferred Stock, but will be senior to the Notes. The terms and conditions of
the Senior Notes Indenture impose restrictions that affect, among other
things, the ability of Issuer to incur debt, pay dividends and make other
restricted payments, make acquisitions, create liens, sell assets and make
certain investments.
DESCRIPTION OF THE NOTES
The New Notes offered hereby will be issued under the Indenture between
the Issuer and The Bank of New York, as Trustee, a copy of which is filed as
an exhibit to the Registration Statement of which this Prospectus constitutes
a part. The following summary, which describes certain provisions of the
Indenture and the Notes, does not purport to be complete and is subject to,
and is qualified in its entirety by reference to the TIA and all the
provisions of the Indenture and the Notes, including the definitions therein
of terms not defined in this Prospectus. Certain terms used in this section
are defined below for purposes of this section under "--Certain Definitions."
The New Notes are identical in all material respects to the terms of the Old
Notes, except for certain transfer restrictions and registration rights
relating to the Old Notes and except that, if the Exchange Offer is not
consummated by July 1, 1996, the rate per annum at which the Old Notes bear
interest will be 9 5/8 % from and including July 1, 1996 until but excluding
the date of the consummation of the Exchange Offer. See "--Registration
Rights" below.
GENERAL
The Notes will mature on January 15, 2003. The Notes will bear interest at
9 1/8 % per annum, payable semiannually in arrears on January 15 and July 15
of each year, commencing July 15, 1996, to the persons who are registered
holders thereof at the close of business on the January 1 or July 1 next
preceding such interest payment date. The rate per annum at which the Notes
will bear interest may increase under certain circumstances described below
under "--Registration Rights."
Interest on the Notes is computed on the basis of a 360-day year of twelve
30-day months. Principal and interest will be payable initially at the office
of the Trustee, but, at the option of the Issuer, interest may be paid by
check mailed to the registered holders of the Notes at their registered
addresses. The Notes are transferable and exchangeable initially at the
office of the Trustee and will be issued only in fully registered form,
without coupons, in denominations of $1,000 and any integral multiple
thereof.
The Notes are, to the extent provided in the Indenture, subordinate and
subject in right of payment to the prior payment in full of all Senior
Indebtedness, as described herein under "--Subordination."
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note.
All Old Notes and New Notes will be treated as a single class of
securities under the Indenture.
OPTIONAL REDEMPTION
Except as set forth in the next paragraph, the Notes may not be redeemed
prior to January 1, 2001. On and after such date, the Notes may be redeemed
at the option of the Issuer, as a whole, or from time to time in part, at the
following redemption prices (expressed as percentages of principal amount),
plus accrued and unpaid interest (if any) to the date of redemption (subject
to the right of holders of record on the relevant record date to receive
interest due on the relevant interest payment date): if redeemed during the
12-month period beginning January 1, 2001, 104.5625%, and thereafter at 100%.
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In addition, upon a Change of Control Call Event prior to January 1, 2001,
the Issuer may, at its option, redeem all, but not less than all, of the
Notes at an aggregate redemption price equal to the sum of: (i) the then
outstanding principal amount of the Notes, plus (ii) accrued and unpaid
interest to the date of redemption, plus (iii) the Applicable Premium.
A "Change of Control Call Event" means the occurrence of either of the
following events:
(i) any Person other than a Permitted Holder shall be the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act),
directly or indirectly, of a majority in the aggregate of the total voting
power of the Voting Stock of the Issuer, whether as a result of issuance
of securities of the Issuer, any merger, consolidation, liquidation or
dissolution of the Issuer, any direct or indirect transfer of securities
by a Permitted Holder or otherwise; or
(ii) a sale, transfer, conveyance or other disposition (other than to
the Issuer or any Affiliate of the Issuer) in a single transaction or in a
series of related transactions, in either case occurring outside the
ordinary course of business, of more than 75% of the assets and 75% of the
deposit liabilities of the Bank shown on the consolidated balance sheet of
the Bank as of the end of the most recent fiscal quarter ending at least
45 days prior to such transaction (or the first transaction in any such
related series of transactions); provided, however, that for purposes of
this clause (ii) if the Issuer at any time holds any assets other than (a)
the Capital Stock of the Bank, (b) Temporary Cash Investments, (c) assets
related to Permitted Business Activities and (d) Permitted Investments
described in clause (iv) of the definition thereof, such other assets
shall be deemed to be assets of the Bank and to have been reflected on
such consolidated balance sheet.
"Applicable Premium" means, with respect to a Note at any time of
determination, the greater of: (i) the product of (x) 4.5625% and (y) the
outstanding principal amount of such Note on such date of determination; and
(ii) the excess of (A) the present value at such time of determination of the
required interest and principal payments payable to and including the first
date on which the Note may be redeemed at the option of the Issuer including
the premium on the Note payable on the first date on which such Note may be
redeemed at the option of the Issuer, computed using a discount rate equal to
the Treasury Rate plus 75 basis points, over (B) the then outstanding
principal amount of the Note.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519)
which has become publicly available at least two business days prior to the
date fixed for repayment (or, if such Statistical Release is no longer
published, any publicly available source of similar market data)) most nearly
equal to the then remaining Average Life to the first date on which Notes are
subject to optional redemption by the Issuer; provided, however, that, if the
Average Life of the Notes to the first date on which Notes are subject to
optional redemption by the Issuer is not equal to the constant maturity of a
United States Treasury security for which a weekly average yield is given,
the Treasury Rate shall be obtained by linear interpolation (calculated to
the nearest one-twelfth of a year) from the weekly average yields of United
States Treasury securities for which such yields are given, except that, if
the Average Life of the Notes to the first date on which Notes are subject to
optional redemption by the Issuer is less than one year, the weekly average
yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used.
Notice of redemption will be mailed at least 30 days but not more than 60
days before any redemption date to each holder of Notes to be redeemed at its
registered address. Notes in denominations larger than $1,000 may be redeemed
in part but only in integral multiples thereof. If money sufficient to pay
the redemption price of all Notes (or portions thereof) to be redeemed on the
redemption date is deposited with the Paying Agent (or, if the Issuer or a
Subsidiary acts as the Paying Agent, it segregates the money held by it as
Paying Agent and holds it as a separate trust fund) on or before the
redemption date, then on and after such date interest ceases to accrue on
such Notes (or such portions thereof) called for redemption.
SINKING FUND
There will be no mandatory sinking fund payments for the Notes.
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CHANGE OF CONTROL PUT EVENT
Upon the occurrence of any of the following events (each a "Change of
Control Put Event"), each holder of Notes will have the right to require the
Issuer to repurchase all or any part of such holder's Notes at a repurchase
price in cash equal to 101% of the principal amount thereof plus accrued and
unpaid interest to the date of repurchase (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date):
(i) any Person other than a Permitted Holder shall be the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act),
directly or indirectly, of a majority in the aggregate of the total voting
power of the Voting Stock of the Issuer, whether as a result of issuance
of securities of the Issuer, any merger, consolidation, liquidation or
dissolution of the Issuer, any direct or indirect transfer of securities
by a Permitted Holder or otherwise;
(ii) a sale, transfer, conveyance or other disposition (other than to
the Issuer or any of its Subsidiaries) in a single transaction or in a
series of related transactions, in either case occurring outside the
ordinary course of business, of more than 75% of the assets and 75% of the
deposit liabilities of the Bank shown on the consolidated balance sheet of
the Bank as of the end of the most recent fiscal quarter ending at least
45 days prior to such transaction (or the first transaction in any such
related series of transactions); provided, however, that for purposes of
this clause (ii) if the Issuer at any time holds any assets other than (a)
the Capital Stock of the Bank, (b) Temporary Cash Investments, (c) assets
related to Permitted Business Activities and (d) Permitted Investments
described in clause (iv) of the definition thereof, such other assets
shall be deemed to be assets of the Bank and to have been reflected on
such consolidated balance sheet; or
(iii) a transaction or series of related transactions as a result of
which 20% or more of the Voting Stock or common stock (or Capital Stock
convertible or exchangeable into 20% of the Voting Stock or common stock)
of the Bank is held by one or more Persons other than the Issuer or its
Wholly Owned Subsidiaries.
Within (x) 45 days following any Change of Control Put Event described in
clauses (i) or (ii) above (except as provided in the succeeding clause (y))
or (y) 125 days following (A) any Change of Control Put Event resulting from
a sale, transfer, conveyance or other disposition described above in clause
(ii) to any Affiliate of the Issuer other than a Subsidiary of the Issuer or
(B) any Change of Control Put Event described above in clause (iii), the
Issuer will mail a notice to each holder of Notes with a copy to the Trustee
stating: (a) that a Change of Control Put Event has occurred and that such
holder has the right to require the Issuer to repurchase all or any part of
such holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest to the date of
repurchase (subject to the right of holders of record on the relevant record
date to receive interest due on the relevant interest payment date); (b) the
circumstances and relevant facts regarding such Change of Control Put Event;
(c) the repurchase date (which will be no earlier than 30 days nor later than
60 days from the date such notice is mailed); and (d) the instructions,
determined by the Issuer consistent with the Indenture, that a holder must
follow in order to have its Notes repurchased.
The Issuer's ability to pay cash to holders of Notes upon a repurchase may
be limited by the Issuer's then existing financial resources. See "Risk
Factors--Indebtedness and Ability to Pay Principal on the Notes."
In addition, the ability of the Issuer to repurchase the Notes as a result
of the occurrence of a Change of Control Put Event will be subject to the
ability of the Issuer to make restricted payments at that time under the
Senior Notes Indenture. Accordingly, the repurchase of the Notes, if not
permitted by the Senior Notes Indenture, could create an event of default
under the Senior Notes Indenture as a result of which any repurchase would,
absent a waiver, be blocked by the subordination provisions of the Indenture.
See "--Subordination." Failure of the Issuer to repurchase the Notes when
required could result in an Event of Default with respect to the Notes
whether or not such repurchase is permitted by the subordination provisions
of the Indenture.
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The Issuer will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other applicable securities laws or
regulations in connection with the repurchase of Notes as a result of a
Change of Control Put Event. To the extent that the provisions of any
securities laws or regulations conflict with the foregoing provisions, the
Issuer will comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligation under this covenant by
virtue thereof.
Certain provisions relating to the Issuer's obligation to make an offer to
repurchase the Notes as a result of a Change of Control Put Event may not be
waived or modified without the written consent of the holders of all the
Notes.
CERTAIN COVENANTS
Set forth below are certain covenants contained in the Indenture:
Limitation on Debt. The Issuer will not issue any Debt and the Issuer will
not permit any Subsidiary to issue any Debt; provided, however, that the
foregoing shall not prohibit the issuance of the following Debt:
(a) the Notes and Debt of the Issuer issued by the Issuer in exchange
for, or the proceeds of which are used to Refinance, the Senior Notes or
any Debt permitted by this clause (a); provided, however, that in the case
of any Debt (other than any Exchange Notes) issued in connection with such
Refinancing, (x) the principal amount or, in the case of Debt issued at a
discount, the accreted value of the Debt so issued shall, as of the date
of the Stated Maturity of the Debt being Refinanced, not exceed the sum of
(i) the principal amount or, if the Debt being Refinanced was issued at a
discount, the accreted value of the Debt being Refinanced as of the date
of the Stated Maturity of the Debt being Refinanced and (ii) any premium
actually paid and reasonable costs and expenses, including underwriting
discounts, in connection with such Refinancing ("Refinancing Costs") or,
if such Debt is issued at a discount, the accreted value of the portion of
such Debt used to pay the Refinancing Costs as of the date of the Stated
Maturity of the Debt being Refinanced, and (y) in the case of a
Refinancing of the Notes, the Debt so issued shall not provide for the
payment of principal in cash prior to the Stated Maturity of the Debt
being Refinanced;
(b) Subordinated Obligations of the Issuer and Parity Obligations of
the Issuer if, immediately after giving effect to any such issuance
(including the Refinancing of any Debt from the proceeds of such
Subordinated or Parity Obligations), the aggregate principal amount of
such Subordinated and/or Parity Obligations, the Senior Notes and Debt
outstanding pursuant to clause (a) above would not exceed an amount equal
to the Consolidated Net Worth of the Issuer as of the end of the most
recent fiscal quarter ending at least 45 days prior to such issuance;
provided, however, that the Subordinated or Parity Obligations so issued
(A) shall not mature prior to the Stated Maturity of the Notes and (B)
shall have an Average Life to their Stated Maturity equal to or greater
than the remaining Average Life to the Stated Maturity of the Notes;
(c) any Debt of any Subsidiary that is a Depository Institution or a
Subsidiary of such Depository Institution; or
(d) if any Mortgage Bank is not a Subsidiary of a Depository
Institution, any Debt issued by such Mortgage Bank in the ordinary course
of funding the origination or carrying of mortgage loans or hedging such
Subsidiary's loan portfolio.
Limitation on Restricted Payments. (a) The Issuer will not, and will not
permit any of its Subsidiaries, directly or indirectly, to, make any
Restricted Payment if, at the time of the making of such Restricted Payment,
and after giving effect thereto:
(1) a Default has occurred or is continuing (or would result
therefrom); or
(2) any Subsidiary that is a Depository Institution does not qualify
as "well capitalized" under Section 28 of the FDIA (or any successor
provision) and the regulations of the OTS thereunder; or
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(3) the Consolidated Common Shareholders' Equity of the Bank as of the
end of the most recent fiscal quarter ending at least 45 days prior to the
date of such Restricted Payment would have been less than the Minimum
Common Equity Amount as of the end of such fiscal quarter; or
(4) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made from and after January 1, 1996 would
exceed the sum of:
(i) 75% of the aggregate Consolidated Net Income (or, if such
aggregate Consolidated Net Income is a deficit, minus 100% of such
deficit) since January 1, 1996 to the end of the most recent fiscal
quarter ending at least 45 days prior to the date of such Restricted
Payment;
(ii) the aggregate Net Cash Proceeds from sales of Capital Stock of
the Issuer (other than Redeemable Stock or Exchangeable Stock) or cash
capital contributions made to the Issuer and any earnings or proceeds
thereof to the extent invested in Temporary Cash Investments, to the
extent received, made or realized on or after the date of original
issuance of the Notes (other than an issuance or sale to a
Subsidiary);
(iii) the amount by which Debt of the Issuer is or has been reduced
on the Issuer's balance sheet on or after the date of original
issuance of the Notes upon the conversion or exchange (other than by a
Subsidiary) of Debt of the Issuer into Capital Stock (other than
Redeemable Stock or Exchangeable Stock) of the Issuer (less the amount
of any cash or other property distributed by the Issuer or any
Subsidiary upon such conversion or exchange); and
(iv) $44,000,000, less an amount equal to 75% of any Special 1995
SAIF Charge.
(b) The preceding paragraph will not prohibit the following (none of which
will be included in the calculation of the amount of Restricted Payments,
except to the extent expressly provided in clause (i) below):
(i) dividends paid within 60 days after the date of declaration
thereof, or Restricted Payments made within 60 days after the making of a
binding commitment in respect thereof, if at such date of declaration or
commitment such dividend or other Restricted Payment would have complied
with this covenant; provided, however, that, at the time of payment of
such dividend or the making of such Restricted Payment, no other Default
shall have occurred and be continuing (or result therefrom); provided
further, however, that such dividend or other Restricted Payment shall be
included in the calculation of the amount of Restricted Payments;
(ii) dividends on the Bank Preferred Stock or Qualified Preferred
Stock;
(iii) any purchase or redemption of Capital Stock or Subordinated
Obligations or Parity Obligations by exchange for or out of the proceeds
from the substantially concurrent sale of Capital Stock; provided,
however, that the Net Cash Proceeds from such sale, to the extent they are
used to purchase or redeem Capital Stock or Subordinated Obligations or
Parity Obligations, shall be excluded from clause (a)(4)(ii) above; or
(iv) any purchase or redemption of Subordinated Obligations or Parity
Obligations by exchange for or out of the proceeds from the substantially
concurrent sale of Subordinated Obligations or Parity Obligations;
provided, however, that (A) such Subordinated Obligations shall be
subordinated to the Notes to at least the same extent as the Subordinated
Obligations so exchanged, purchased or redeemed, (B) such Subordinated or
Parity Obligations shall have a Stated Maturity later than the Stated
Maturity of the Notes and (C) such Subordinated or Parity Obligations
shall have an Average Life to their Stated Maturity greater than the
remaining Average Life to the Stated Maturity of the Notes.
(c) The Issuer or any Subsidiary may take actions to make a Restricted
Payment in anticipation of the occurrence of any of the events described in
paragraph (b) of this covenant; provided, however, that the making of such
Restricted Payment shall be conditioned upon the occurrence of such event.
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Limitation on Transactions with Affiliates. (a) The Issuer will not, and
will not permit any of its Subsidiaries to, conduct any business or enter
into any transaction or series of similar transactions (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of the Issuer or any legal or beneficial owner of
10% or more of the Voting Stock of the Issuer or with an Affiliate of any
such owner unless:
(i) the terms of such business, transaction or series of transactions
are (A) set forth in writing and (B) at least as favorable to the Issuer
or such Subsidiary as terms that would be obtainable at the time for a
comparable transaction or series of similar transactions in arm's-length
dealings with an unrelated third Person; and
(ii) to the extent that such business, transaction or series of
transactions is known by the Board of Directors of the Issuer or such
Subsidiary to involve an Affiliate of the Issuer or a legal or beneficial
owner of 10% or more of the Voting Stock of the Issuer or an Affiliate of
such owner, then:
(A) with respect to a transaction or series of related transactions
involving aggregate payments or other consideration in excess of
$500,000, such transaction or series of related transactions has been
determined to satisfy the requirements of clause (i)(B) above (and the
value of any non-cash consideration has been determined) by a majority
of those members of the Board of Directors of the Issuer or such
Subsidiary having no personal stake in such business, transaction or
series of transactions; and
(B) with respect to a transaction or series of related transactions
involving aggregate payments or other consideration in excess of
$10,000,000 (with the value of any non-cash consideration being
determined by a majority of those members of the Board of Directors of
the Issuer or such Subsidiary having no personal stake in such
business, transaction or series of transactions), such transaction or
series of related transactions has been determined, in the written
opinion of a nationally recognized investment banking firm, to be
fair, from a financial point of view, to the Issuer or such Subsidiary
and the Issuer has delivered such opinion to the Trustee.
(b) The provisions of the preceding paragraph (a) above will not prohibit:
(i) any Restricted Payment permitted to be paid as described under
"Limitation on Restricted Payments" above, (ii) any transaction between the
Issuer and any of its Subsidiaries or between Subsidiaries of the Issuer and
any transaction with an Unrestricted Affiliate; provided, however, that no
portion of any minority interest in any such Subsidiary and no equity
interest in any such Unrestricted Affiliate is owned by (x) any Affiliate of
the Issuer (other than the Bank, a Wholly Owned Subsidiary of the Issuer, an
Unrestricted Affiliate or a Permitted Affiliate) or (y) any legal or
beneficial owner of 10% or more of the Voting Stock of the Issuer or any
Affiliate of such owner (other than the Issuer, the Bank, any Wholly Owned
Subsidiary of the Issuer or an Unrestricted Affiliate), (iii) transactions
pursuant to which Mafco Holdings will provide the Issuer and its Subsidiaries
at the request of the Issuer with certain allocated services to be purchased
from third party providers, such as legal and accounting services, insurance
coverage and other services, (iv) any transaction with an executive officer
or director of any Subsidiary of the Issuer entered into in the ordinary
course of business (including compensation or employee benefit arrangements
with any such executive officer or director); provided, however, that such
executive officer or director holds, directly or indirectly, no more than 10%
of the outstanding Capital Stock of the Issuer, and (v) any transactions
pursuant to the Tax Sharing Agreement.
Limitation on Other Business Activities. The Issuer will not engage in any
trade or business other than: (i) the ownership of the Capital Stock of the
Bank, (ii) the ownership of the Capital Stock of one or more other
Subsidiaries engaged in activities permissible for subsidiaries of a multiple
savings and loan holding company under Section 10 of the HOLA (or any
successor provision), (iii) the holding of Permitted Investments, and (iv)
Permitted Business Activities.
Limitations on Restrictions on Distributions by Subsidiaries. The Issuer
shall not, and shall not permit any Subsidiary of the Issuer to, suffer to
exist any consensual encumbrance or restriction on the ability of any
Subsidiary of the Issuer: (i) to pay, directly or indirectly, dividends or
make any other
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distributions in respect of its Capital Stock or to pay any Debt or other
obligation owed to the Issuer, (ii) to make loans or advances to the Issuer,
or (iii) to transfer any of its property or assets to the Issuer, except, in
any such case, any encumbrance or restrictions:
(a) pursuant to any agreement in effect or entered into on the date of
the Indenture (including the Senior Notes Indenture and the Bank Preferred
Stock);
(b) pursuant to an agreement in effect or entered into by such
Subsidiary prior to the date on which such Subsidiary was acquired by the
Issuer (other than Debt issued as consideration in, or to provide all or
any portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such
Subsidiary became a Subsidiary or was acquired by the Issuer and other
than any agreement entered into in anticipation of the acquisition of such
Subsidiary by the Issuer) and outstanding on such date;
(c) pursuant to an agreement effecting a renewal, extension,
Refinancing or refunding of Debt or Preferred Stock issued pursuant to an
agreement referred to in clause (a) or (b) above or this clause (c) or
contained in any amendment to an agreement referred to in clauses (a) and
(b) or this clause (c); provided, however, that the provisions contained
in such renewal, extension, Refinancing or refunding agreement or in such
amendment relating to such encumbrance or restriction are no more
restrictive than the provisions contained in the agreement the subject
thereof, as determined in good faith by the Board of Directors of the
Issuer and evidenced by a resolution adopted by such Board;
(d) any encumbrance or restriction (A) that restricts in a customary
manner the subletting, assignment or transfer of any property or asset
that is a lease, license, conveyance or contract or similar property or
asset, (B) by virtue of any transfer of, agreement to transfer, option or
right with respect to, or Lien on, any property or assets of the Issuer or
any Subsidiary not otherwise prohibited by the Indenture or (C) arising or
agreed to in the ordinary course of business and that does not,
individually or in the aggregate, detract from the value of property or
assets of the Issuer or any Subsidiary in any manner material to the
Issuer or such Subsidiary;
(e) in the case of clause (iii) above, restrictions contained in
security agreements securing Debt of a Subsidiary to the extent such
restrictions restrict the transfer of the property subject to such
security agreements;
(f) any encumbrance or restriction relating to a mortgage banking
Subsidiary contained in an agreement providing for "warehouse" or other
financing for such Subsidiary for originating or carrying mortgage loans
or hedging such Subsidiary's loan portfolio;
(g) any encumbrance or restriction imposed by, or otherwise agreed to
with, any governmental agency having regulatory supervision over the Bank
or any other Subsidiary of the Issuer; and
(h) pursuant to the terms of any Qualified Preferred Stock issued
after the date of the Indenture.
Limitation on Issuance of Other Subordinated Debt. So long as any of the
Notes are Outstanding, the Issuer will not issue, assume, guarantee, incur or
otherwise become liable for, directly or indirectly, any Debt (other than the
New Notes) subordinate or junior in ranking in any respect to any Senior
Indebtedness unless such Debt is a Parity Obligation or is expressly
subordinated in right of payment to the Notes.
Limitation on Liens. The Issuer will not create or permit to exist any
Lien (other than a Lien in favor of the trustee under the Senior Notes
Indenture to secure certain of the Issuer's obligations to such trustee) on
any of its property or assets (including Capital Stock), whether owned on the
date of the Indenture or thereafter acquired, securing any obligation of the
Issuer, other than (i) Liens securing Senior Indebtedness or (ii) Liens
securing any Parity Obligation, provided that, contemporaneously therewith,
effective provision shall be made to secure the Notes equally and ratably
with such Parity Obligation with a Lien on the assets securing such Parity
Obligation for so long as such Parity Obligation is secured by such Lien.
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Amendment of Tax Sharing Agreement. (a) The Issuer will not terminate,
amend, modify or waive any provisions of the Tax Sharing Agreement; provided,
however, that anything to the contrary in this sentence notwithstanding, any
provision of the Tax Sharing Agreement may be amended to the extent required
by or otherwise agreed to with, any governmental agency having regulatory
supervision over the Bank or any other Subsidiary of the Issuer.
Notwithstanding the foregoing, no such terminations, amendments,
modifications or waivers shall be permitted by this covenant if such
terminations, amendments, modifications or waivers shall adversely affect the
Issuer or its rights or obligations under the Tax Sharing Agreement.
(b) Nothing in this covenant will prohibit the replacement of Mafco
Holdings as "Parent" under the Tax Sharing Agreement with any other
corporation that becomes the "common parent" (within the meaning of Section
1504 of the Code) of the affiliated group of corporations with respect to
which a consolidated Federal income tax return is filed that includes the
Issuer and the Bank and the amendment of the Tax Sharing Agreement to reflect
such replacement.
Maintenance of Status of Subsidiaries as Insured Depository Institutions;
Capital Maintenance. (a) The Issuer will do or cause to be done all things
necessary to preserve and keep in full force and effect the status of each of
its Subsidiaries that is a Depository Institution as an insured depository
institution and do all things necessary to ensure that savings accounts of
each such Subsidiary are insured by the FDIC or any successor organization up
to the maximum amount permitted by 12 U.S.C. Section 1811 et seq. and the
regulations thereunder or any succeeding federal law, except as to individual
accounts or interests in employee benefit plans that are not entitled to
"pass-through" insurance under 12 U.S.C. Section 1821(a)(1)(D).
(b) The Issuer shall cause the Bank to maintain or exceed the status of an
"adequately capitalized" institution as defined in the FDIA and OTS
regulations.
SEC Reports. Notwithstanding that the Issuer may not be required to be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Issuer will file or cause to be filed with the SEC and provide the
Trustee and holders of the Notes with the information, documents and other
reports (or copies of such portions of any of the foregoing as the SEC may by
rules and regulations prescribe) specified in Sections 13 and 15(d) of the
Exchange Act. The Issuer also will comply with the other provisions of TIA
Section 314(a).
SUCCESSOR COMPANY
The Issuer may not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any person, unless:
(i) the resulting, surviving or transferee person (if not the Issuer) is
organized and existing under the laws of the United States of America, any
State thereof or the District of Columbia and such person expressly assumes
by a supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Issuer under the
Indenture and the Notes, (ii) immediately after giving effect to such
transaction (and treating any Debt which becomes an obligation of the
resulting, surviving or transferee person or any of its Subsidiaries as a
result of such transaction as having been issued by such person or such
Subsidiary at the time of such transaction), no Default has occurred and is
continuing, (iii) immediately after giving effect to such transaction, the
resulting, surviving or transferee person has a Consolidated Net Worth in an
amount which is not less than the Consolidated Net Worth of the Issuer
immediately prior to such transaction, and (iv) the Issuer delivers to the
Trustee an Officers' Certificate and an Opinion of Counsel, each stating that
such consolidation, merger or transfer complies with the Indenture and such
supplemental indenture (if any) complies with the Indenture and the TIA. The
resulting, surviving or transferee person will be the successor company and
will succeed to, and be substituted for, and may exercise every right and
power of, the Issuer under the Indenture, and thereafter, except in the case
of a lease, the Issuer will be discharged from all obligations and covenants
under the Indenture and the Notes.
DEFAULTS
An Event of Default is defined in the Indenture as: (i) (1) a default by
the Issuer in the payment of principal of any Note when due and payable at
its Stated Maturity, upon redemption, upon required
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purchase, upon declaration or otherwise, or (2) a default by the Issuer in
the payment of interest on any Note when due and payable and the continuance
of such default for a period of 30 days, or (3) a failure by the Issuer to
purchase Notes when required pursuant to the Indenture or the Notes, (ii) the
failure by the Issuer to comply with its obligations described under
"Successor Company" above, (iii) the failure by the Issuer to comply for 30
days after notice with any of its obligations under the covenant described
under "Change of Control Put Event" (other than a failure to purchase Notes),
or under the covenants described under "Limitation on Debt," "Limitation on
Restricted Payments," "Limitation on Transactions with Affiliates,"
"Limitation on Other Business Activities," "Limitations on Restrictions on
Distributions by Subsidiaries," "Limitations on Issuance of Other
Subordinated Debt," "Limitations on Liens," "Amendment of Tax Sharing
Agreement," "Maintenance of Status of Subsidiaries as Insured Depository
Institutions; Capital Maintenance" or "SEC Reports" above, (iv) the failure
by the Issuer to comply for 60 days after notice with its other agreements
contained in the Indenture or the Notes (other than those referred to in
clauses (i), (ii) and (iii) of this paragraph), (v) Debt of the Issuer or any
Significant Subsidiary is not paid within any applicable grace period after
final maturity or is accelerated by the holders thereof because of a default
and the total principal amount of the portion of such Debt that is unpaid or
accelerated exceeds $25 million or its foreign currency equivalent and such
default continues for 5 days after notice (the "cross acceleration
provision"), (vi) certain events of bankruptcy, insolvency or reorganization
of the Issuer or a Significant Subsidiary (the "bankruptcy provisions"), or
(vii) any judgment or decree for the payment of money in excess of $25
million is entered against the Issuer or a Significant Subsidiary and is not
discharged and either (A) an enforcement proceeding has been commenced by any
creditor upon such judgment or decree or (B) there is a period of 60 days
following the entry of such judgment or decree during which such judgment or
decree is not discharged, waived or the execution thereof stayed and, in the
case of (B), such default continues for 10 days after the notice specified in
the next sentence (the "judgment default provision"). However, a default
under clauses (iii), (iv), (v) and (vii)(B) will not constitute an Event of
Default until the Trustee or the holders of 25% in principal amount of the
outstanding Notes notify the Issuer of the default and the Issuer does not
cure such default within the time specified after receipt of such notice.
If an Event of Default (other than an Event of Default specified in clause
(vi) in the above paragraph with respect to the Issuer) occurs and is
continuing, the Trustee or the holders of at least 25% in principal amount of
the outstanding Notes may declare the principal amount of and accrued
interest on all the Notes as of the date of such declaration to be
immediately due and payable (collectively, the "Default Amount"). If an Event
of Default relating to certain events of bankruptcy, insolvency or
reorganization of the Issuer occurs, the Default Amount on all the Notes as
of the date of such Event of Default will ipso facto become and be
immediately due and payable without any declaration or other act on the part
of the Trustee or any holders of the Notes. Under certain circumstances, the
holders of a majority in principal amount of the outstanding Notes may
rescind any such acceleration with respect to the Notes and its consequences.
Notwithstanding the foregoing, if an Event of Default shall have occurred
and be continuing, the Trustee or the Holders of the Notes electing to
accelerate the Notes pursuant to the Indenture shall give the Designated
Senior Indebtedness Representatives five Business Days' prior written notice
before accelerating the Notes, which notice shall state that it is a "Notice
of Intent to Accelerate;" provided, however, that the Trustee or such Holders
may so accelerate the Notes without such notice if at such time payment of
any Designated Senior Indebtedness shall have been accelerated. See
"--Subordination."
Subject to the provisions of the Indenture relating to the duties of the
Trustee, the Trustee will be under no obligation to exercise any of the
rights or powers under the Indenture at the request or direction of any of
the holders of the Notes (whether an Event of Default has occurred and is
continuing, or otherwise) unless such holders have offered to the Trustee
reasonable indemnity or security against any loss, liability or expense.
Except to enforce the right to receive payment of principal or interest when
due, no holder of a Note may pursue any remedy with respect to the Indenture
or the Notes unless: (i) such holder has previously given the Trustee written
notice that an Event of Default is continuing, (ii) holders of at least 25%
in principal amount of the outstanding Notes have requested the Trustee to
pursue the remedy, (iii) such holders have offered the Trustee reasonable
security or indemnity against any loss,
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liability or expense, (iv) the Trustee has not complied with such request
within 60 days after the receipt thereof and the offer of security or
indemnity, and (v) the holders of a majority in principal amount of the
outstanding Notes have not given the Trustee a direction inconsistent with
such request within such 60-day period. Subject to certain restrictions, the
holders of a majority in principal amount of the outstanding Notes are given
the right to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or of exercising any trust or power
conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or, subject to the
provisions of the Indenture relating to Duties of Trustee, that the Trustee
determines is unduly prejudicial to the rights of any other holder of a Note
or that would involve the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder of the Notes
notice of the Default within 90 days after it occurs. Except in the case of a
Default in the payment of principal of or interest on any Note, the Trustee
may withhold notice if and so long as a committee of its Trust Officers in
good faith determines that withholding notice is in the interest of the
holders of the Notes. In addition, the Issuer is required to deliver to the
Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred
during the previous year. The Issuer also is required to deliver to the
Trustee, within 30 days after the occurrence thereof, written notice of any
event which would constitute certain Defaults, their status and what action
the Issuer is taking or proposes to take in respect thereof.
SUBORDINATION
As set forth in the Indenture, the Notes will be subordinated in right of
payment to the prior payment in full of all Senior Indebtedness. In the event
of (i) any insolvency, bankruptcy or similar proceeding relative to the
Issuer, or (ii) any liquidation, dissolution, reorganization or other winding
up of the Issuer, or (iii) any assignment for the benefit of creditors or any
other marshalling of assets and liabilities of the Issuer, the holders of the
Senior Indebtedness will be entitled to receive payment in full of all
amounts due or to become due on or in respect of such Senior Indebtedness
before the holders of the Notes will be entitled to receive any payment of
principal of or interest on the Notes.
In the event that, notwithstanding the foregoing, the Trustee or any
holder of Notes receives any Securities Payment before all Senior
Indebtedness is paid in full, and if such fact was, at or prior to the time
of such payment or distribution, known to the Trustee or, as the case may be,
the holder, such payment or distribution will be required to be paid over
forthwith to the trustee in bankruptcy, receiver or other person making
payment or distribution of assets of the Issuer for application to the
payment of all Senior Indebtedness remaining unpaid.
In the event of a Senior Payment Default or Acceleration, unless and until
such event of default is cured or waived or shall have ceased to exist and
any such acceleration shall have been rescinded or annulled, or such Senior
Indebtedness has been discharged, no Securities Payment will be made;
provided, however, the Issuer may make Securities Payments without regard to
the foregoing if the Issuer receives written notice approving such payment
from the Designated Senior Indebtedness Representatives for all issues of
Designated Senior Indebtedness then outstanding.
In the event of any Senior Nonmonetary Default, upon the earlier to occur
of (a) receipt by the Issuer and the Trustee of written notice of such Senior
Nonmonetary Default from the Designated Senior Indebtedness Representative
with respect to the Designated Senior Indebtedness to which such Senior
Nonmonetary Default relates, and (b) if such Senior Nonmonetary Default
results from the acceleration of the Notes, the date of such acceleration, no
Securities Payment will be made during the period (the "Payment Blockage
Period") commencing on the date of such receipt of such written notice or the
date of such acceleration, as the case may be, and ending on the earliest of
(i) the date on which such Senior Nonmonetary Default is cured or waived or
has ceased to exist and any acceleration of Designated Senior Indebtedness
has been rescinded or annulled or the Designated Senior Indebtedness to which
such Senior Nonmonetary Default relates has been discharged, (ii) the 179th
day after the date of such receipt of such written notice or the date of such
acceleration, as the case may be, and (iii) such date as such Payment
Blockage Period has been terminated by written notice to the Issuer or the
Trustee from the Designated
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Senior Indebtedness Representative initiating such Payment Blockage Period,
after which, in the case of clause (i), (ii) or (iii), the Issuer will resume
making any and all required payments in respect of the Notes, including any
missed payments. No more than one Payment Blockage Period may be commenced
with respect to the Notes during any 365-day period and there will be a
period of at least 186 consecutive days in each 365-day period when no
Payment Blockage Period is in effect. For all purposes of this paragraph, no
Senior Nonmonetary Default that existed or was continuing on the date of
commencement of any Payment Blockage Period will be, or be made, the basis
for the commencement of a subsequent Payment Blockage Period by holders of
Senior Indebtedness or their representatives unless such Senior Nonmonetary
Default has been cured or waived for a period of not less than 90 consecutive
days.
In the event that, notwithstanding the foregoing, the Issuer makes any
payment to the Trustee or the holder of any Security prohibited by the
foregoing provisions, and if such fact is at or prior to the time of such
payment, known to the Trustee or, as the case may be, such holder, then and
in such event such payment must be paid over and delivered forthwith to the
holders of Senior Indebtedness as their interests may appear.
Nothing in the Indenture or in any of the Notes prevents (a) the Issuer,
at any time except during the pendency of any case, proceeding, dissolution,
liquidation or other winding up, assignment for the benefit of creditors or
other marshalling of assets and liabilities of the Issuer or under the
conditions described above in the preceding four paragraphs, from making
payments at any time of principal of or interest on the Notes, or (b) the
application by the Trustee of any money deposited with it hereunder to the
payment of or on account of the principal of or interest on the Notes or the
retention of such payment by the holders, if, at the time of such application
by the Trustee, it did not have knowledge that such payment would have been
prohibited by the subordination provisions of the Indenture.
By reason of such subordination, in the event of insolvency, creditors of
the Issuer who are not holders of Senior Indebtedness, including holders of
Notes, may recover less, ratably, than holders of Senior Indebtedness. The
Notes are obligations of the Issuer, and Subsidiaries of the Issuer,
including the Bank, have no obligations, contingent or otherwise, to pay any
amounts due pursuant to the Notes or to make funds available therefor.
AMENDMENT
Subject to certain exceptions, the Indenture may be amended with the
written consent of the holders of a majority in principal amount of the Notes
then outstanding and any past default or noncompliance with any provisions
may be waived with the consent of the holders of a majority in principal
amount of the Notes then outstanding. However, without the consent of each
holder of an outstanding Note affected, no amendment may, among other things:
(i) reduce the principal amount of Notes whose holders must consent to an
amendment, (ii) reduce the rate of or extend the time for payment of interest
on any Note, (iii) reduce the principal of or extend the Stated Maturity of
any Note or reduce the Default Amount of any Note, (iv) reduce the premium
payable upon the redemption of any Note or change the time at which any Note
may be redeemed as described under "Optional Redemption" above, (v) make any
Note payable in money other than that stated in the Note, (vi) make any
change in the definition of Change of Control or in the dates by which the
Issuer must purchase, or in the obligation of the Issuer to purchase,
tendered Notes upon a Change of Control, (vii) make any changes in the
provisions relating to waiver of past defaults or the provisions relating to
the rights of Holders to receive payment, or (viii) make any change in the
amendment provisions of the Indenture which require each holder's consent.
Without the consent of or notice to any holder of the Notes, the Issuer
and the Trustee may amend the Indenture (i) to cure any ambiguity, omission,
defect or inconsistency, (ii) to provide for the assumption by a successor
corporation of the obligations of the Issuer under the Indenture if in
compliance with the provisions described under "Successor Company" above,
(iii) to provide for uncertificated Notes in addition to or in place of
certificated Notes (provided that the uncertificated Notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated Notes are described in Section 163(f)(2)(B) of
the Code), (iv) to add guarantees with respect to the Notes or to secure (or
provide additional security for) the Notes, (v) to add to the covenants of
the Issuer for the benefit of the holders of the Notes or to surrender any
right or power conferred upon
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the Issuer, (vi) to provide for issuance of the Exchange Notes, which will
have terms substantially identical in all material respects to the Notes
(except that the interest rate and transfer restrictions contained in the
Notes will be modified or eliminated, as appropriate), and which will be
treated, together with any outstanding Notes, as a single issue of
securities, or (vii) to make any change that does not adversely affect the
rights of any holder of the Notes or to comply with any requirement of the
SEC in connection with the qualification of the Indenture under the TIA.
The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Issuer is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the
Notes, or any defect therein, will not impair or affect the validity of the
amendment.
A consent to any amendment or waiver under the Indenture by any holder of
Notes given in connection with a tender of such holder's Notes will not be
rendered invalid by such tender.
TRANSFER
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of
transfer. The Issuer may require payment of a sum sufficient to cover any
tax, assessment or other governmental charge payable in connection with
certain transfers and exchanges.
DEFEASANCE
The Issuer at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust (as herein defined) and
obligations to register the transfer or exchange of the Notes, to replace
mutilated, destroyed, lost or stolen Notes and to maintain a registrar and
paying agent in respect of the Notes. The Issuer at any time may terminate
its obligations under the covenants described under "Certain Covenants" and
"Change of Control Put Event" above, the operation of the cross acceleration
provision, the bankruptcy provisions with respect to Significant Subsidiaries
and the judgment default provision and the limitation contained in clause
(iii) described under "Successor Company" above ("covenant defeasance").
The Issuer may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Issuer exercises its
legal defeasance option, payment of the Notes may not be accelerated because
of an Event of Default with respect thereto. If the Issuer exercises its
covenant defeasance option, payment of the Notes may not be accelerated
because of an Event of Default specified in clause (iii), (v), (vi) (with
respect to Significant Subsidiaries only) or (vii) under "Defaults" above, or
because of the failure of the Issuer to comply with clause (iii) described
under "Successor Company" above.
In order to exercise either defeasance option, the Issuer must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal on the Notes and interest
thereon to maturity or redemption, as the case may be, and must comply with
certain other conditions, including, but not limited to (unless the Notes
will mature or be redeemed within 30 days), delivering to the Trustee an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
deposit and defeasance and will be subject to federal income tax on the same
amount and in the same manner and at the same times as would have been in the
case if such deposit and defeasance had not occurred (and, in the case of
legal defeasance only, such Opinion of Counsel must be based on a ruling of
the Internal Revenue Service or a change in applicable federal income tax
law).
CONCERNING THE TRUSTEE
The Bank of New York is the Trustee under the Indenture and has been
appointed by the Issuer as Registrar and Paying Agent with regard to the
Notes.
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GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
The following are certain definitions used in the Indenture and applicable
to the description of the Indenture set forth herein.
"Affiliate" of any specified Person means: (i) any other Person which,
directly or indirectly, is in control of, is controlled by or is under common
control with such specified Person or (ii) any other Person who is a director
or executive officer (A) of such specified Person, (B) of any Subsidiary of
such specified Person or (C) of any Person described in clause (i) above. For
purposes of this definition, control of a Person means the power, direct or
indirect, to direct or cause the direction of the management and policies of
such Person whether by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Average Life" means, with respect to any Debt, the quotient obtained by
dividing: (i) the sum of the products of (a) the number of years from the
date of the transaction or event giving rise to the need to calculate the
Average Life of such Debt to the date, or dates, of each successive scheduled
principal payment of such Debt multiplied by (b) the amount of each such
principal payment by (ii) the sum of all such principal payments.
"Bank" means First Nationwide Bank, A Federal Savings Bank.
"Bank Preferred Stock" means the 11-1/2% Noncumulative Perpetual Preferred
Stock issued by the Bank or, at the Issuer's election, other Preferred Stock
of the Bank issued to Refinance such stock in an aggregate liquidation value
at no time exceeding the sum of the liquidation value of the Bank Preferred
Stock on the date of the Indenture plus reasonable fees and expenses incurred
in connection with such Refinancing and accrued dividends and premium, if
any.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person or any committee thereof duly authorized to act on
behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" of a Person means any obligation which is
required to be classified and accounted for as a capital lease on the face of
a balance sheet of such Person prepared in accordance with GAAP; the amount
of such obligation shall be the capitalized amount thereof, determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of
the last payment of rent or any other amount due under such lease prior to
the first date upon which such lease may be terminated by the lessee without
payment of a penalty.
"Capital Stock" of any Person means any and all shares, interests
(including partnership interests), rights to purchase, warrants, options,
participations or other equivalents of or interests in (however designated)
equity of such Person, including any Preferred Stock, but excluding any debt
securities convertible into or exchangeable for such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Common Shareholders' Equity" of the Bank means, at any date,
all amounts which would, in conformity with GAAP, be included under
shareholders' equity on a consolidated balance sheet of the Bank as at such
date, less (i) any amounts included therein attributable to, without
duplication, (x) Redeemable Stock, (y) Exchangeable Stock and (z) Preferred
Stock and (ii) the amount of the Capital Contribution.
"Consolidated Net Income" of the Issuer means for any period the
consolidated net income (or loss) of the Issuer and its consolidated
Subsidiaries for such period determined in accordance with GAAP, less,
without duplication, the amount of dividends declared in respect of the Bank
Preferred Stock and any
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Qualified Preferred Stock during such period (to the extent not deducted from
Consolidated Net Income in accordance with GAAP); provided, however, that
there shall be excluded therefrom:
(a) any net income (or loss) of any Person if such Person is not a
Subsidiary, except that (A) the Issuer's equity in the net income of any
such Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Person during such period to the Issuer or a Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution to a Subsidiary, to the limitations contained in clause (c)
below) and (B) the Issuer's equity in a net loss of any such Person for
such period shall be included in determining such Consolidated Net Income;
(b) any net income (but not loss) of any Person acquired by the Issuer
or a Subsidiary in a pooling of interests transaction for any period prior
to the date of such acquisition;
(c) any net income (or loss) of any Subsidiary (other than the Bank or
any of its Subsidiaries) if such Subsidiary is subject to restrictions,
directly or indirectly, on the payment of dividends or the making of
distributions by such Subsidiary, directly or indirectly, to the Issuer
(other than restrictions contained in any Qualified Preferred Stock),
except that (A) the Issuer's equity in the net income of any such
Subsidiary for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Subsidiary during such period to the Issuer or another Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or
other distribution to another Subsidiary, to the limitation contained in
this clause) and (B) the Issuer's equity in a net loss of any such
Subsidiary for such period shall be included in determining such
Consolidated Net Income;
(d) any gain (but not loss) realized upon the sale or other
disposition of any property, plant or equipment of the Issuer or its
consolidated Subsidiaries (other than in connection with the sale of
insured deposits) (including pursuant to any sale-and-leaseback
arrangement) and any gain (but not loss) realized upon the sale or other
disposition of any Capital Stock of any Person;
(e) the cumulative effect of a change in accounting principles; and
(f) the gain (but not the loss) from the sale, transfer, conveyance or
other disposition (other than to the Issuer or any of its Subsidiaries) in
a single transaction or in a series of related transactions, in either
case occurring outside the ordinary course of business, of more than 75%
of the assets of the Mortgage Bank shown on a balance sheet of the
Mortgage Bank as of the end of the most recent fiscal quarter ending at
least 45 days prior to such transaction (or the first transaction in such
related series of transactions).
"Consolidated Net Worth" of any Person means, at any date, all amounts
which would, in conformity with GAAP, be included under shareholders' equity
on a consolidated balance sheet of such Person as at such date, less any
amounts included therein attributable to (x) Redeemable Stock and (y)
Exchangeable Stock.
"Debt" of any Person means, without duplication,
(i) the principal of and premium (if any) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar instruments for the
payment of which such Person is responsible or liable;
(ii) all Capital Lease Obligations of such Person;
(iii) all obligations of such Person issued as the deferred purchase
price of property, all conditional sale obligations of such Person and all
obligations of such Person under any title retention agreement (but
excluding trade accounts payable and other accrued current liabilities
arising in the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in (i) through
(iii) above) entered into
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in the ordinary course of business of such Person to the extent such
letters of credit are not drawn upon or, if and to the extent drawn upon,
such drawing is reimbursed no later than the third Business Day following
receipt by such Person of a demand for reimbursement following payment on
the letter of credit);
(v) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Redeemable Stock (but
excluding in each case any accrued dividends);
(vi) all obligations of the type referred to in clauses (i) through
(v) of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including Guarantees of
such obligations and dividends; and
(vii) all obligations of the type referred to in clauses (i) through
(vi) of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of
such property or assets or the amount of the obligation so secured.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Depository Institution" shall have the meaning attributed thereto in
Section 3(c)(1) of the FDIA, 12 U.S.C. Section 1813(c)(1), or a similar
definition under any successor statute.
"Designated Senior Indebtedness" means, as of any date of determination,
(i) the Senior Notes and any Refinancing thereof and (ii) any other Senior
Indebtedness, provided that for purposes of this clause (ii) the Senior
Indebtedness issued or incurred in any single transaction shall not be
Designated Senior Indebtedness unless the Senior Indebtedness issued or
incurred in such transaction (including any commitments to lend), at the time
of issuance, had an aggregate principal amount outstanding (including any
commitments to lend) exceeding $25,000,000 and was specifically designated by
the Issuer in the instrument evidencing such Senior Indebtedness as
"Designated Senior Indebtedness."
"Designated Senior Indebtedness Representative" means any trustee, agent
or representative (if any) for an issue of Designated Senior Indebtedness.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchangeable Stock" means any Capital Stock of a Person which is
exchangeable or convertible into another security (other than Capital Stock
of such Person which is neither Exchangeable Stock nor Redeemable Stock).
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, as in effect from time
to time, except that, for purposes of calculating Consolidated Net Income,
Consolidated Net Worth and Consolidated Common Shareholders' Equity, it shall
mean generally accepted accounting principles in the United States as in
effect on the date of the Indenture.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Debt or other obligation of any
Person and any obligation, direct or indirect, contingent or otherwise, of
such Person: (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Debt or other obligation of such Person (whether
arising by virtue of partnership arrangements, or by agreement to keep well,
to purchase assets, goods, securities or services, to take-or-pay, or to
maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Debt or
other obligation of the payment thereof or to protect such obligee against
loss in respect thereof (in whole or in part); provided, however, that the
term "Guarantee" shall not include endorsements for collection or deposit in
the ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Investment" in any Person means any loan or advance to, any net payment
on a Guarantee of, any acquisition of Capital Stock, equity interest,
obligation or other security of, or capital contribution or other investment
in, such Person. Investments shall exclude loans or advances to customers and
suppliers in the ordinary course of business. The term "Invest" has a
corresponding meaning.
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"issue" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Debt or Capital Stock of a Person existing
at the time such Person becomes a Subsidiary of another Person (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be issued
by such Subsidiary at the time it becomes a Subsidiary of such other Person.
"Lien" means any mortgage, pledge, security interest, conditional sale or
other title retention agreement or other similar lien.
"Mafco Holdings" means Mafco Holdings Inc., a Delaware corporation, and
its successors.
"Minimum Common Equity Amount" means, as of the end of any fiscal quarter,
an amount equal to the sum of (i) $400 million and (ii) the excess, if any,
of amounts attributable to goodwill and core deposit intangible on the
consolidated balance sheet of the Bank as at the end of such fiscal quarter,
over $100 million.
"Mortgage Bank" means any Subsidiary of the Issuer, other than the Bank,
that is engaged in the mortgage banking business, including the business of
originating or carrying mortgage loans.
"Net Cash Proceeds", with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys'
fees, accountants' fees, underwriters' or placement agents' fees, discounts
or commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or estimated in
good faith to be payable as a result thereof.
"Non-Convertible Capital Stock" means, with respect to any corporation,
any non-convertible Capital Stock of such corporation and any Capital Stock
of such corporation convertible solely into non-convertible common stock of
such corporation; provided, however, that Non-Convertible Capital Stock shall
not include any Redeemable Stock or Exchangeable Stock.
"Officer" means the Chairman of the Board, the Vice Chairman, the
President, any Vice President, the Treasurer, an Assistant Treasurer or the
Secretary or an Assistant Secretary of the Issuer.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board, the Vice Chairman, the President or a Vice President (regardless of
Vice Presidential designation), and by the Treasurer, an Assistant Treasurer,
Secretary or an Assistant Secretary, of the Issuer, and delivered to the
Trustee. One of the Officers signing an Officers' Certificate given pursuant
to the requirement for a compliance certificate as described in the last
paragraph under "Defaults" above shall be the principal executive, financial
or accounting officer of the Issuer.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Issuer (or Mafco Holdings or one of its Subsidiaries) or the
Trustee.
"Optional Redemption Amount" means at any time the price at which the
Notes are then redeemable pursuant to an optional redemption by the Issuer.
"Parity Obligation" means any Debt of the Issuer which specifically
provides by its terms that it ranks pari passu with the Notes as to payments
of principal and interest.
"Permitted Affiliate" means any individual who is a director or executive
officer of the Issuer, of a Subsidiary of the Issuer or of an Unrestricted
Affiliate; provided, however, that such individual is not also a director or
executive officer of Mafco Holdings, any Person that controls Mafco Holdings
or any successor to any of the foregoing.
"Permitted Business Activities" means, with respect to any Person: (i) the
annuities and mutual funds sales business, (ii) the asset and real estate
management business, and (iii) any other business activity permissible for
Subsidiaries of a multiple savings and loan holding company under Section 10
of the HOLA (or any successor provision); provided, however, that in
connection with such business activities such Person may not have total
liabilities of more than $1,000,000.
"Permitted Holders" means Ronald O. Perelman (or in the event of his
incompetence or death, his estate, heirs, executor, administrator, committee
or other personal representative (collectively, "heirs")) or any Person
controlled, directly or indirectly, by Ronald O. Perelman or his heirs.
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"Permitted Investments" means: (i) Temporary Cash Investments, (ii)
investments by the Bank consisting of loans to directors and executive
officers (other than any such director or executive officer that is the
beneficial owner of 10% or more of the Voting Stock of the Issuer) of any
Subsidiary of the Issuer made in the ordinary course of its business and in
compliance with all regulatory restrictions on such loans, (iii) Investments
by any Subsidiary of the Issuer (to the extent that and for so long as such
Subsidiary, if it were the Bank or a Subsidiary of the Bank, would be
permitted, under applicable laws and regulations, to make such Investment) in
any Person other than an Affiliate of the Issuer (other than an Unrestricted
Affiliate, a Subsidiary of the Issuer or a Person that would become an
Unrestricted Affiliate or a Subsidiary as a result of such Investment), (iv)
Investments by the Issuer consisting of loans to Affiliates of the Issuer so
long as (in the case of this clause (iv) only) the Consolidated Common
Shareholders' Equity of the Bank as of the end of the most recent fiscal
quarter ending at least 45 days prior to the date of such Investment was at
least equal to the Minimum Common Equity Amount as of the end of such fiscal
quarter, (v) Investments by the Issuer in any Subsidiary of the Issuer; (vi)
Investments by the Issuer in any Person which would become a Subsidiary of
the Issuer as a result of such Investment, but only if after giving effect to
such Investment such Subsidiary is not engaged in any trade or business other
than (x) activities permissible for subsidiaries of a multiple savings and
loan holding company under Section 10 of the HOLA (or any successor
provision), and (y) the ownership of the Capital Stock of one or more other
Subsidiaries engaged solely in such activities; and (vii) Investments by any
Subsidiary of the Issuer in the Issuer.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other
entity.
"Preferred Stock" as applied to the Capital Stock of any corporation means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Qualified Minority Shareholder" means any minority shareholder of a
Subsidiary of the Issuer if, at the time of determination, the Senior Notes
remain outstanding, but shall otherwise mean any such minority shareholder
who is not an Affiliate of the Issuer (other than an Unrestricted Affiliate,
a Permitted Affiliate or a Subsidiary of the Issuer).
"Qualified Preferred Stock" means (x) any Preferred Stock of any
Subsidiary of the Issuer (other than the Bank Preferred Stock) which meets
the requirements set forth in clauses (a), (b), (c) and (d) below, and (y)
any Preferred Stock of any Subsidiary of the Issuer (other than the Bank
Preferred Stock) issued to Refinance any other Qualified Preferred Stock or,
at the Issuer's election, to Refinance any Bank Preferred Stock provided that
the Preferred Stock issued in such Refinancing meets the requirements set
forth in clauses (a), (b), (c) and (e) below:
(a) Such Preferred Stock does not contain any mandatory redemption
provisions which would require it to be redeemed prior to the first
anniversary of the Stated Maturity of the Notes;
(b) The terms of such Preferred Stock do not impose any consensual
encumbrance or restriction on the ability of the issuer thereof to pay
dividends or make distributions on its common stock except in a manner that
is no more restrictive in any material respect than the following, as
determined in good faith by the Board of Directors of the Issuer and
evidenced by a resolution adopted by such Board:
(i) Dividends and distributions on common stock or other capital stock
of the issuer may not be declared or paid or set apart for payment at any
time when the issuer has not declared and paid any dividends or
distributions on such Preferred Stock which are required to be declared
and paid as a precondition to dividends or distributions on other capital
stock of the issuer;
(ii) Distributions upon the liquidation, dissolution or winding up of
the issuer, whether voluntary or involuntary ("Liquidating
Distributions"), may not be made on the common stock or other capital
stock of the issuer at any time when such Preferred Stock is entitled to
receive Liquidating Distributions which have not been paid; and
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(iii) Dividends and distributions on common stock or other capital
stock of the issuer may not be declared or paid or set apart for payment
at any time when such Preferred Stock is required to be, but has not been,
redeemed pursuant to redemption provisions which meet the requirements of
clause (a) above;
(c) The terms of such Preferred Stock do not impose any consensual
encumbrance or restriction on the ability of the issuer thereof (i) to pay
any Debt or other obligation owed to the Issuer; (ii) to make loans or
advances to the Issuer; or (iii) to transfer any of its property or assets to
the Issuer, except, in any such case, any encumbrance or restriction
permitted under "--Certain Covenants--Limitations on Restrictions on
Distributions by Subsidiaries" (other than clause (h) thereof);
(d) In the case of Preferred Stock issued pursuant to clause (x) above,
Consolidated Net Income of the Issuer for the Relevant Period (as defined in
the next sentence) on a pro forma basis, after giving effect to (i) the
issuance of such Preferred Stock (including fees and expenses incurred in
connection with such issuance), (ii) the use of the proceeds thereof, if any,
(iii) any acquisition of capital stock or assets of another Person occurring
in connection with the issuance of such Preferred Stock (including the
anticipated revenue and earnings relating thereto) and (iv) any dividend or
other payment obligations with respect to such Preferred Stock, in each case
as if such Preferred Stock had been issued and any such acquisition had been
made on the first day of the Relevant Period, is no less than the actual
Consolidated Net Income of the Issuer for the Relevant Period. "Relevant
Period" means, with respect to any issuance of Preferred Stock, the four full
fiscal quarters most recently ended at least 45 days prior to the date of
such issuance. For purposes of this clause (d), whenever pro forma effect is
to be given to an acquisition of capital stock or assets, the amount of
revenue and earnings relating thereto, or any other circumstance, the pro
forma calculations shall be determined in good faith by a responsible
financial or accounting officer of the Issuer; and
(e) In the case of Preferred Stock issued in a Refinancing pursuant to
clause (y) above, the aggregate liquidation value of such Preferred Stock
shall not exceed the sum of the liquidation value of the Preferred Stock
being Refinanced on the date it was originally issued plus reasonable fees
and expenses incurred in connection with such Refinancing and accrued
dividends and premium, if any.
"Redeemable Stock" means, with respect to any Person, Capital Stock of
such Person that by its terms or otherwise is required to be redeemed on or
prior to the first anniversary of the Stated Maturity of the Notes or is
redeemable at the option of the holder thereof at any time on or prior to the
first anniversary of the Stated Maturity of the Notes.
"Refinance" means, in respect of any Debt or Preferred Stock, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire,
or to issue Debt or Preferred Stock in exchange or replacement for, such Debt
or Preferred Stock. "Refinanced" and "Refinancing" shall have correlative
meanings.
"Registration Agreement" means the Registration Agreement dated January
23, 1996, between the Issuer and the Purchasers named therein.
"Registered Exchange Offer" has the meaning ascribed thereto in the
Registration Agreement.
"Restricted Payment" means, as to any Person making a Restricted Payment:
(i) the declaration or payment of any dividend or any distribution on or in
respect of the Capital Stock of such Person (including any payment in
connection with any merger or consolidation involving such Person) or to the
holders of the Capital Stock of such Person (except (x) dividends or
distributions payable solely in the Non-Convertible Capital Stock of such
Person or in options, warrants or other rights to purchase the
Non-Convertible Capital Stock of such Person, and (y) dividends or
distributions on Capital Stock of a Subsidiary of the Issuer payable to the
Issuer or a Subsidiary of the Issuer and to Qualified Minority Shareholders),
(ii) any purchase, redemption or other acquisition or retirement for value of
any Capital Stock (including the Bank Preferred Stock) of the Issuer or any
Subsidiary, (iii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment, of any Parity Obligation or
Subordinated Obligation (other than the purchase, repurchase or other
acquisition of Parity Obligations or Subordinated Obligations purchased in
anticipation of satisfying a sinking fund obligation, principal installment
or final maturity, in each case due within one year of the date of
acquisition), and (iv) any Investment in any Person other than a Permitted
Investment.
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"Securities Payment" means (i) any payment or distribution of any kind or
character, whether in cash, property or securities (including any such
payment or distribution which may be payable or deliverable by reason of the
payment of any other Debt of the Issuer being subordinated to the payment of
the Notes), which may be payable or deliverable in respect of the Notes in
any case, proceeding, dissolution, liquidation or other winding up, or
otherwise on account of any principal or interest on the Notes (except for
payments from money or the proceeds of U.S. Governmental Obligations held in
trust pursuant to the provisions described under "--Defeasance"), (ii) any
payment on account of the purchase or other acquisition of the Notes, or
(iii) any deposit made pursuant to the provisions described under
"--Defeasance."
"Senior Indebtedness" means the following obligations, whether outstanding
on the date of the Indenture or thereafter created, incurred or assumed, and
whether at any time owing actually or contingent:
(i) all obligations in respect of the Senior Notes (including all
obligations in respect thereof consisting of the principal of and premium,
if any, and accrued and unpaid interest (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization
relating to the Issuer), and all fees, expenses and other amounts);
(ii) all obligations consisting of the principal of and premium, if
any, and accrued and unpaid interest (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization
relating to the Issuer), and all fees, expenses and other amounts, in
respect of (A) indebtedness of the Issuer for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which the Issuer is responsible or liable;
(iii) all Capital Lease Obligations of the Issuer;
(iv) all obligations of the Issuer (A) for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction, (B) under interest rate swaps, caps, collars, options and
similar arrangements and foreign currency hedges entered into in respect
of any obligations described in clauses (i), (ii) and (iii) or (C) issued
or assumed as the deferred purchase price of property and all conditional
sale obligations of the Issuer and all obligations of the Issuer under any
title retention agreement;
(v) all obligations of other Persons of the type referred to in
clauses (ii), (iii) and (iv) and all dividends of other Persons for the
payment of which, in either case, the Issuer is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including by
means of any agreement which has the economic effect of a Guarantee; and
(vi) all obligations of the Issuer consisting of modifications or
Refinancings of any obligation described in clauses (i), (ii), (iii), (iv)
or (v);
unless, in the case of any particular obligation, in the instrument creating
or evidencing the same or pursuant to which the same is outstanding, it is
provided that such obligations (a) are subordinate in right of payment to
Senior Indebtedness or (b) are not superior in right of payment to the Notes;
provided, however, that Senior Indebtedness shall not include (1) Debt of the
Issuer to a Subsidiary of the Issuer or any other Affiliate of the Issuer or
any of such Affiliate's Subsidiaries, other than any such Debt consisting of
Senior Notes or any Refinancing thereof, (2) any liability for federal,
state, local or other taxes owed or owing by the Issuer, (3) any accounts
payable or other liability to trade creditors arising in the ordinary course
of business (including Guarantees thereof or instruments evidencing such
liabilities), (4) any indebtedness, Guarantee or obligation of the Issuer
which is subordinate or junior in any respect to any other indebtedness,
Guarantee or obligation of the Issuer, (5) Debt of or amounts owed by the
Issuer for compensation to employees or for services rendered to the Issuer,
(6) amounts owing under leases (other than Capitalized Lease Obligations),
(7) that portion of any Debt which at the time of Issuance is Issued in
violation of the Indenture; provided, however, that in the case of this
clause (7), (A) any Debt Issued to any Person who had no actual knowledge
that the Issuance of such Debt was not permitted under the Indenture and who
received on the date of Issuance thereof a certificate from an
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officer of the Issuer to the effect that the Issuance of such Debt would not
violate the Indenture shall constitute Senior Indebtedness and (B) any Debt
arising from the honoring by a bank or other financial institution of a
check, draft or similar instrument inadvertently (except in the case of
daylight overdrafts) drawn against insufficient funds in the ordinary course
of business shall constitute Senior Indebtedness provided that such Debt is
extinguished within three business days of Issuance or (8) the Notes or the
Exchange Notes.
"Senior Nonmonetary Default" means the occurrence or existence and
continuance of any event of default, or of any event which, after notice or
lapse of time (or both), would become an event of default, under the terms of
any instrument pursuant to which any Designated Senior Indebtedness is
outstanding, permitting (after notice or lapse of time or both) one or more
holders of such Designated Senior Indebtedness (or a Designated Senior
Indebtedness Representative) to declare such Designated Senior Indebtedness
due and payable prior to the date on which it would otherwise become due and
payable, other than a Senior Payment Default or Acceleration.
"Senior Notes" means the Issuer's 12 1/4 % Senior Notes Due 2001 and the
Issuer's 12 1/4 % Senior Exchange Notes Due 2001 issued by the Issuer
pursuant to the Senior Notes Indenture.
"Senior Notes Indenture" means the Indenture, dated as of July 15, 1994,
between the Issuer and The First National Bank of Boston, as Trustee, as such
Indenture may be amended from time to time, under which the Senior Notes were
issued.
"Senior Payment Default or Acceleration" means (i) the occurrence or
continuance of any default in the payment of principal of or interest on any
Senior Indebtedness or (ii) the occurrence of any other default on Senior
Indebtedness resulting in the maturity of such Senior Indebtedness being
accelerated in accordance with its terms.
"Shelf Registration Statement" has the meaning ascribed thereto in the
Registration Agreement.
"Significant Subsidiary" means: (i) any Subsidiary of the Issuer which at
the time of determination either (A) had assets which, as of the date of the
Issuer's most recent quarterly consolidated balance sheet, constituted at
least 5% of the Issuer's total assets on a consolidated basis as of such
date, in each case determined in accordance with GAAP, or (B) had revenues
for the 12-month period ending on the date of the Issuer's most recent
quarterly consolidated statement of income which constituted at least 5% of
the Issuer's total revenues on a consolidated basis for such period or (ii)
any Subsidiary of the Issuer which, if merged with all Defaulting
Subsidiaries (as defined below) of the Issuer, would at the time of
determination either (A) have had assets which, as of the date of the
Issuer's most recent quarterly consolidated balance sheet, would have
constituted at least 10% of the Issuer's total assets on a consolidated basis
as of such date or (B) have had revenues for the 12-month period ending on
the date of the Issuer's most recent quarterly consolidated statement of
income which would have constituted at least 10% of the Issuer's total
revenues on a consolidated basis for such period (each such determination
being made in accordance with GAAP). "Defaulting Subsidiary" means any
Subsidiary of the Issuer with respect to which an event described under
clause (v), (vi) or (vii) of "Defaults" above has occurred and is continuing.
"Special 1995 SAIF Charge" means any charge to earnings (net of taxes)
taken by the Bank in the fourth quarter of 1995 on account of any mandatory
special assessment or other similar charge imposed in connection with the
recapitalization of the SAIF because the Bank's deposits are insured by the
FDIC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory
redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency).
"Subordinated Obligation" means any Debt of the Issuer (whether
outstanding on the date hereof or hereafter issued) which is subordinate or
junior in right of payment to the Notes.
"Subsidiary" means as to any Person any corporation, association,
partnership or other business entity of which more than 50% of the total
voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned, directly or indirectly, by: (i) such Person,
(ii) such Person and one or more Subsidiaries of such Person or (iii) one or
more Subsidiaries of such Person.
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"Tax Sharing Agreement" means: (i) that certain agreement effective as of
January 1, 1994 by and among the Issuer, certain of its Subsidiaries and
Mafco Holdings, and (ii) any other tax allocation agreement between the
Issuer or any of its Subsidiaries with the Issuer or any direct or indirect
shareholder of the Issuer with respect to consolidated or combined tax
returns including the Issuer or any of its Subsidiaries but only to the
extent that amounts payable from time to time by the Issuer or any such
Subsidiary under any such agreement do not exceed the corresponding tax
payments that the Issuer or such Subsidiary would have been required to make
to any relevant taxing authority had the Issuer or such Subsidiary not joined
in such consolidated or combined returns, but instead had filed returns
including only the Issuer or its Subsidiaries, provided that any such
agreement may provide that, if the Issuer or any such Subsidiary ceases to be
a member of the affiliated group of corporations of which Mafco Holdings is
the common parent for purposes of filing a consolidated Federal income tax
return (such cessation, a "Deconsolidation Event"), then the Issuer or such
Subsidiary shall indemnify such direct or indirect shareholder with respect
to any Federal, state or local income, franchise or other tax liability
(including any related interest, additions or penalties) imposed on such
shareholder as the result of an audit or other adjustment with respect to any
period prior to such Deconsolidation Event that is attributable to the
Issuer, such Subsidiary or any predecessor business thereof (computed as if
the Issuer, such Subsidiary or such predecessor business, as the case may be,
were a stand-alone entity that filed separate tax returns as an independent
corporation), but only to the extent that any such tax liability exceeds any
liability for taxes recorded on the books of the Issuer or such Subsidiary
with respect to any such period.
"Temporary Cash Investments" means any of the following: (i) any
investment in direct obligations of the United States of America or any
agency thereof or obligations Guaranteed by the United States of America or
any agency thereof, in each case, maturing within 360 days of the date of
acquisition thereof, (ii) investments in time deposit accounts, certificates
of deposit and money market deposits maturing within 180 days of the date of
acquisition thereof issued by a bank or trust company (including the Trustee)
which is organized under the laws of the United States of America, any state
thereof or any foreign country recognized by the United States having
capital, surplus and undivided profits aggregating in excess of $250,000,000
and whose debt is rated "A" (or such similar equivalent rating) or higher by
at least one nationally recognized statistical rating organization (as
defined for purposes of Rule 436 under the Securities Act) or any
money-market fund sponsored by any registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30
days for underlying securities of the types described in clause (i) above
entered into with a bank meeting the qualifications described in clause (ii)
above, (iv) investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other than an
Affiliate or Subsidiary of the Issuer) organized and in existence under the
laws of the United States of America or any foreign country recognized by the
United States of America with a rating at the time as of which any investment
therein is made of "P-2" (or higher) according to Moody's Investors Service,
Inc. or "A-2" (or higher) according to Standard and Poor's Corporation and
(v) securities with maturities of six months or less from the date of
acquisition backed by standby or direct pay letters of credit issued by any
bank satisfying the requirements of clause (ii) above.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Section Section
77aaa-77bbbb) as in effect on the date of the Indenture; provided, however,
that in the event the Trust Indenture Act of 1939 is amended after such date,
"TIA" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939 as so amended.
"Trustee" means the party named as such in the Indenture until a successor
replaces it and, thereafter, means the successor.
"Trust Officer" means any officer or assistant officer of the Trustee
assigned by the Trustee to administer its corporate trust matters.
"Unrestricted Affiliate" means a Person (other than a Subsidiary of the
Issuer) controlled (as defined in the definition of "Affiliate") by the
Issuer, in which no Affiliate of the Issuer (other than (w) the Issuer, (x) a
Wholly Owned Subsidiary of the Issuer, (y) a Permitted Affiliate and (z)
another Unrestricted Affiliate) has an Investment.
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"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States
of America (including any agency or instrumentality thereof) for the payment
of which the full faith and credit of the United States of America is pledged
and which are not callable at the Issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly Owned Subsidiary" means the Bank and any Subsidiary of the Issuer
all the Capital Stock of which (other than directors' qualifying shares or
Qualified Preferred Stock) is owned by the Issuer, the Bank or another Wholly
Owned Subsidiary.
REGISTRATION RIGHTS
Holders of New Notes are not entitled to any registration rights with
respect to the New Notes. Pursuant to the Registration Agreement, holders of
Old Notes are entitled to certain registration rights. Under the Registration
Agreement, the Issuer has agreed, for the benefit of the holders of the Old
Notes, that it will, at its cost, (i) by March 18, 1996, file a registration
statement with the SEC with respect to the Exchange Offer and (ii) by May 30,
1996, use its best efforts to cause such registration statement to be
declared effective under the Securities Act. The Registration Statement of
which this Prospectus is a part constitutes the registration statement for
the Exchange Offer.
In the event that applicable interpretations of the staff of the SEC do
not permit the Issuer to effect the Exchange Offer, or if for any other
reason the Exchange Offer is not consummated within 180 days of the date of
the Registration Agreement, the Issuer will, at its cost, (a) as promptly as
practicable, file a shelf registration statement covering resales of the Old
Notes, (b) use its best efforts to cause such shelf registration statement to
be declared effective under the Securities Act and (c) use its best efforts
to keep effective the shelf registration statement until three years after
its effective date. The Issuer will, in the event the filing of such shelf
registration statement becomes necessary, provide to each holder of the Old
Notes copies of the prospectus, which is a part of the shelf registration
statement, notify each such holder when the shelf registration statement for
the Old Notes has become effective and take certain other actions as are
required to permit unrestricted resales of the Notes. A holder of Old Notes
who sells such Old Notes pursuant to the shelf registration statement
generally would be required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to purchasers, will be subject
to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Agreement which are applicable to such a holder (including
certain indemnification obligations). If by July 1, 1996, neither (i) the
Exchange Offer is consummated nor (ii) a shelf registration statement with
respect to the resale of the Old Notes is declared effective, the rate per
annum at which the Notes bear interest will be 9 5/8 % from and including
July 1, 1996, until but excluding the earlier of (i) the consummation of the
Exchange Offer and (ii) the effective date of such shelf registration
statement.
The summary herein of certain provisions of the Registration Agreement
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Registration Agreement, a
copy of which is filed as an exhibit to the Registration Statement of which
this Prospectus constitutes a part.
BOOK ENTRY; DELIVERY AND FORM
The certificates representing the New Notes will be issued in fully
registered form, without coupons. Except as set forth below, the New Notes
will be deposited with, or on behalf of, The Depository Trust Company, New
York, New York ("DTC"), and registered in the name of Cede & Co. ("Cede") as
DTC's nominee in the form of a global Note certificate (the "Global
Certificate") or will remain in the custody of the Trustee pursuant to the
FAST Balance Certificate Agreement between DTC and the Trustee.
Subject to the terms of the Indenture and the limitations applicable to
the Global Certificate, New Notes may be presented for exchange as provided
below or for registration of transfer (duly endorsed or
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with the form of transfer endorsed thereon duly executed) at the office of
the Registrar or at the office of any transfer agent designated by the Issuer
for such purpose. Such transfer or exchange will be effected upon the
Registrar's or such transfer agent's, as the case may be, being satisfied
with the documents of title and identity of the Person making the request.
The Issuer has appointed the Trustee as Registrar. The Issuer may at any time
designate additional transfer agents or rescind the designation of any
transfer agent or approve a change in the office through which any transfer
agent acts; provided, however, that there shall at all times be a transfer
agent in the Borough of Manhattan, The City of New York.
Global Certificate
Ownership of beneficial interests in the Global Certificate will be
limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants. Upon the issuance of the Global
Certificate, DTC or its custodian will credit, on its internal system, the
respective principal amount of the individual beneficial interests
represented by such Global Certificate to the accounts of its participants.
Ownership of beneficial interests in the Global Certificate will be shown on,
and the transfer of those ownership interests will be effected through,
records maintained by DTC or its nominee (with respect to interests of
participants) or by any such participant (with respect to interests of
persons held by such participants on their behalf). Payments, transfers,
exchanges and other matters relating to beneficial interests in the Global
Certificate may be subject to various policies and procedures adopted by DTC
from time to time. None of the Issuer, the Trustee or any of their agents
will have any responsibility or liability for any aspect of DTC's or any
participant's records relating to, or for payments made on account of,
beneficial interests in the Global Certificate, or for maintaining,
supervising or reviewing any records relating to such beneficial interests.
The Global Certificate will be exchanged for New Notes in certificated
form if (i) DTC notifies the Issuer that it is unwilling or unable to
continue as depositary for the Global Certificate or has ceased to be
qualified to act as such as required by the Indenture or (ii) there shall
have occurred and be continuing an Event of Default with respect to the New
Note. Upon the occurrence of such an event, owners of beneficial interests in
the Global Certificate will receive physical delivery of Notes in
certificated form. All New Notes issued in exchange for the Global
Certificate or any portion thereof will be registered in such names as DTC
shall direct.
As long as DTC, or its nominee, is the registered holder of the Global
Certificate, DTC or such nominee, as the case may be, will be considered the
sole owner and holder of such Global Certificate (and of the New Notes
represented thereby) for all purposes under the Indenture and the New Notes.
Except in the circumstances referred to in the preceding paragraph, owners of
beneficial interests in the Global Certificate will not be considered the
owners or holders of such Global Certificate (or any New Notes represented
thereby) for any purpose under the Indenture or the New Notes. In addition,
no beneficial owner of an interest in the Global Certificate will be able to
transfer that interest except in accordance with DTC's applicable procedures
(in addition to those under the Indenture) referred to herein. All payments
of principal of, and any interest on, the Global Certificate will be made to
DTC or its nominee, as the case may be, as the holder thereof. The laws of
some jurisdictions require that certain purchasers of securities take
physical delivery of such securities in definitive form.
Investors may hold their interests in the Global Certificate, directly
through DTC if they are participants in such system, or indirectly through
organizations which are participants in such system.
The Issuer expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of the Global Certificate held by it or its
nominee, will credit the accounts of the participants with payments of
principal or interest on the date payable in amounts proportionate to their
respective beneficial interests in the principal amount of such Global
Certificate as shown on the records of DTC or its nominee. The Issuer also
expects that payments by participants to owners of beneficial interests in
such Global Certificate held through such participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in street name. Such
payments will be the responsibility of such participants.
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Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC's procedures.
DTC has advised the Issuer that it will take any action permitted to be
taken by a holder of New Notes (including the presentation of New Notes for
exchange as described below) only at the direction of one or more
participants to whose account with DTC interest in the Global Certificate are
credited and only in respect of such portion of the aggregate principal
amount of the Notes as to which such participant or participants has or have
given such direction. However, if an Event of Default occurs and is
continuing under the Notes, DTC will exchange the Global Certificate for
legended certificated Notes in definitive form, which it will distribute to
its participants.
DTC has advised the Issuer as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended.
DTC was created to hold securities for its participants and facilitate the
clearance and settlement of securities transactions between participants
through electronic book-entry changes in accounts of its participants,
thereby eliminating the need for physical movement of certificates.
Participants include securities brokers and dealers, banks, trust companies
and clearing corporations and may include certain other organizations.
Indirect access to the DTC system is available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Certificated Notes
As set forth above under "--Global Certificate," if DTC or any successor
depositary is at any time unwilling or unable to continue as a depositary for
the reasons set forth above under "--Global Certificate" or if there shall
have occurred and be continuing an Event of Default with respect to the New
Notes, the Issuer will issue certificates for the New Notes in definitive
registered form in exchange for the Global Certificate. Certificates for New
Notes delivered in exchange for the Global Certificate or beneficial
interests therein will be registered in the names, and issued in any approved
denominations, requested by DTC.
The holder of a registered New Note may transfer such New Note by
surrendering it at (i) the office or agency maintained by the Issuer for such
purpose in the Borough of Manhattan, The City of New York, which initially
will be the office of the Trustee or (ii) the office of any transfer agent
appointed by the Issuer.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain U.S. federal income tax consequences
associated with the exchange of Old Notes for New Notes and the ownership and
disposition of the New Notes by holders who acquire the New Notes pursuant to
the Exchange Offer. The summary is based upon current laws, regulations,
rulings and judicial decisions all of which are subject to change. The
discussion below does not address all aspects of U.S. federal income taxation
that may be relevant to particular holders in the context of their specific
investment circumstances or certain types of holders subject to special
treatment under such laws (for example, financial institutions and tax-exempt
organizations). In addition, the discussion does not address any aspect of
state, local or foreign taxation and assumes that holders of the New Notes
will hold them as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Code.
For purposes of this discussion, a "United States Holder" is an individual
who is a citizen or resident of the United States, a corporation, a
partnership or other entity created under the laws of the United States or
any political subdivision thereof, or an estate or trust that is subject to
U.S. federal income taxation without regard to the source of income.
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PROSPECTIVE HOLDERS OF THE NEW NOTES ARE URGED TO CONSULT THEIR TAX
ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE
EXCHANGE OF OLD NOTES FOR NEW NOTES AND THE OWNERSHIP AND DISPOSITION OF THE
NEW NOTES AS WELL AS THE APPLICATION OF STATE, LOCAL AND FOREIGN INCOME AND
OTHER TAX LAW.
EXCHANGE OF NOTES
The exchange of Old Notes for New Notes pursuant to the Exchange Offer
should not be treated as an exchange or other taxable event for U.S. federal
income tax purposes because, under regulations proposed by the United States
Treasury, the New Notes should not be considered to differ materially in kind
or extent from the Old Notes. Rather, the New Notes received by a holder
should be treated as a continuation of the Old Notes in the hands of such
holder. As a result, there should be no U.S. federal income tax consequences
to holders who exchange Old Notes for New Notes pursuant to the Exchange
Offer and any such holder should have the same tax basis and holding period
in the New Notes as it had in the Old Notes immediately before the exchange.
UNITED STATES HOLDERS
Interest payable on the New Notes will be includible in the income of a
United States Holder in accordance with such holder's regular method of
accounting. If a New Note is redeemed, sold or otherwise disposed of, a
United States Holder generally will recognize gain or loss equal to the
difference between the amount realized on the sale or other disposition of
such New Note (to the extent such amount does not represent accrued but
unpaid interest) and such holder's tax basis in the New Note. Subject to the
market discount rules discussed below, such gain or loss will be capital gain
or loss, assuming that the holder has held the New Note as a capital asset,
and will be long-term if the holder has a holding period for the New Note
(which would include the holding period of the Old Notes) of more than one
year at the time of the disposition.
Under the market discount rules of the Code, a holder (other than a holder
who made the election described below) who purchased an Old Note with "market
discount" (generally defined as the amount by which the stated redemption
price at maturity of the Old Note exceeds the holder's purchase price) will
be required to treat any gain recognized on the redemption, sale or other
disposition of the New Note received in the exchange as ordinary income to
the extent of the market discount that accrued during the holding period of
such New Note (which would include the holding period of the Old Note). A
holder who has elected under applicable Code provisions to include market
discount in income annually as such discount accrues will not, however, be
required to treat any gain recognized as ordinary income under these rules.
Holders should consult their tax advisors as to the portion of any gain that
would be taxable as ordinary income under these provisions.
NON-UNITED STATES HOLDERS
An investment in the New Notes by a non-United States Holder generally
will not give rise to any U.S. federal income tax consequences, unless the
interest received or any gain recognized on the sale, redemption or other
disposition of the New Notes by such holder is treated as effectively
connected with the conduct by such holder of a trade or business in the
United States, or, in the case of gains derived by an individual, such
individual is present in the United States for 183 days or more and certain
other requirements are met.
In order to avoid back-up withholding of 31% and withholding of 30% under
Section 1441 of the Code (to the extent such interest qualifies as portfolio
interest for purposes of Section 1441) on payments of interest made by U.S.
payors, a non-United States Holder of the New Notes generally must complete,
and provide the payor with, an Internal Revenue Service Form W-8
("Certificate of Foreign Status"), or other documentary evidence, certifying
that such holder is exempt from back-up withholding.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Issuer has agreed that for a period of 180 days after
the Expiration Date, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
such resale. In addition, until August 13, 1996, all dealers effecting
transactions in the New Notes may be required to deliver a prospectus.
The Issuer will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such New
Notes. Any broker-dealer that resells New Notes that were received by it for
its own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of 180 days after the Expiration Date, the Issuer will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that request such document
in the Letter of Transmittal. The Issuer has agreed to pay all expenses
incident to the Exchange Offer other than commissions or concessions of any
brokers or dealers and will indemnify the holders of the Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the issuance of the
New Notes will be passed upon for the Issuer by Paul, Weiss, Rifkind, Wharton
& Garrison, New York, New York. Skadden, Arps, Slate, Meagher & Flom has
acted as counsel for the Issuer in connection with the Exchange Offer.
Skadden, Arps, Slate, Meagher & Flom and Paul, Weiss, Rifkind, Wharton &
Garrison have from time to time represented, and may continue to represent,
MacAndrews & Forbes and certain of its affiliates (including the Issuer and
the Bank) in connection with certain legal matters. Joseph H. Flom, a partner
in the firm of Skadden, Arps, Slate, Meagher & Flom, is a director of Revlon
Group Incorporated, a wholly owned subsidiary of MacAndrews & Forbes.
EXPERTS
The Consolidated Financial Statements of the Issuer as of December 31,
1995 and 1994, and for each of the years in the three-year period ended
December 31, 1995, have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing. The report of
KPMG Peat Marwick LLP refers to a change in accounting for mortgage servicing
rights in 1995, a change in accounting for certain investments in debt and
equity securities in 1994 and a change in accounting for income taxes in
1993.
The consolidated statements of financial condition of the FNB Acquired
Business as of December 31, 1993, and the consolidated statements of
operations, equity and cash flows for each of the two years in the period
ended December 31, 1993, have been included in this Registration Statement in
reliance upon the report of Coopers & Lybrand LLP, independent accountants,
given on the authority of that firm as experts
152
<PAGE>
in accounting and auditing. The report of Coopers & Lybrand LLP covering the
December 31, 1992 consolidated financial statements refers to a change in
accounting for income taxes and postretirement health benefits.
The consolidated financial statements of SFFed as of December 31, 1995 and
1994, and for each of the three years in the period ended December 31, 1995
included in this Prospectus, which is part of this Registration Statement,
have been audited by Deloitte & Touche LLP, independent auditors, as stated
in their report appearing herein (which report expresses an unqualified
opinion and includes an explanatory paragraph relating to the acquisition of
SFFed), and have been included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
153
<PAGE>
INDEX OF DEFINED TERMS*
<TABLE>
<CAPTION>
PAGE
TERM NUMBER
- ----------------------------- --------
<S> <C>
Acquisitions ................. 12
ACS .......................... 93
ALCO ......................... 58
AMT .......................... 16
Andrews Group ................ 128
Applicable Premium ........... 130
ARM .......................... 56
ARMs ......................... 56
Asset Purchase Agreement .... 5
Assistance Agreement ......... 5
Assumed Liabilities .......... 107
Bank ......................... 1
BankAmerica .................. 5
Bank Preferred Stock ......... 1
bankruptcy provisions ........ 135
BIF .......................... 67
Bonuses ...................... 121
Book-Entry Confirmation ..... 68
Book-Entry Transfer Facility 68
Branch Purchases ............. 4
Branch Sales ................. 4
Brokered Deposits ............ 98
Capital Contribution ......... 4
Capital Loss Coverage ........ 104
Cede ......................... 148
Certificate of Foreign Status 151
Change of Control Call Event 128
Change of Control Put Event . 129
Closing Adjustment Documents 107
Closing Date ................. 102
CMOs ......................... 94
Code ......................... 23
Coleman ...................... 118
Coleman Worldwide ............ 118
Consolidated Cigar ........... 118
Consulting Agreement ......... 124
covenant defeasance .......... 138
Covered Assets ............... 5
Covered Asset Recovery ....... 104
CRA .......................... 80
cross acceleration provision 135
Default Amount ............... 135
defeasance trust ............. 138
DTC .......................... 148
Eligible Institutions ........ 69
Event of Default ............. 134
Exchange Act ................. 2
Exchange Agent ............... 8
Exchange Agreement ........... 124
Exchange Offer ............... 1
Expiration Date .............. 68
Fair Lending Laws ............ 116
FASB ......................... 21
FDIC ......................... 3
FDIC Purchase ................ 48
FDICIA ....................... 18
FGB Realty ................... 50
FGMH ......................... 42
FHLB ......................... 42
FHLBS ........................ 3
FHLMC ........................ 82
First Gibraltar .............. 5
First Gibraltar Holdings .... 5
First Gibraltar Oklahoma Sale 5
First Gibraltar Texas Sale .. 5
First Madison ................ 5
First Nationwide ............. 1
First Nationwide Management . 125
First United Bank Group ..... 118
FN Acquisition ............... 5
FNB Acquired Business ........ 5
FNIC ......................... 105
FNMA ......................... 82
FNMC ......................... 4
Ford Bank Group .............. 119
Ford Motor ................... 5
Ford Obligation .............. 124
FRB .......................... 110
FSLIC ........................ 5
FSLIC/RF ..................... 5
FSLIC/RF Reimbursement ....... 104
Global Certificate ........... 148
GNMA ......................... 79
Granite ...................... 5
Guaranteed Yield ............. 104
heirs ........................ 142
HFFC ......................... 4
HOLA ......................... 3
Holdings ..................... 6
Home Federal ................. 4
Home Federal Acquisition .... 4
HUD .......................... 87
Hunter's Glen ................ 6
Illinois Sale ................ 27
</TABLE>
- ------------
* Does not include terms defined under "Description of the Notes--Certain
Definitions."
154
<PAGE>
<TABLE>
<CAPTION>
PAGE
TERM NUMBER
- ----------------------------- --------
<S> <C>
Incentive Plan ............... 121
Indenture .................... 2
indirect participants ........ 150
Initial Purchasers ........... 1
IRR .......................... 111
IRS .......................... 28
Issuer ....................... 1
ITT Purchase ................. 4
judgment default provision .. 135
Junior Stock ................. 18
legal defeasance ............. 138
leverage capital ratio ....... 65
LMP .......................... 88
LMUSA ........................ 4
LMUSA Purchases .............. 4
LMUSA 1995 Purchase .......... 4
LMUSA 1996 Purchase .......... 4
LOC .......................... 102
LTV .......................... 22
MacAndrews & Forbes .......... 6
MacAndrews Holdings .......... 5
Madison Financial ............ 124
Madison Realty ............... 118
Mafco Consolidated ........... 118
Mafco Group .................. 23
Mafco Holdings ............... 6
Mafco Worldwide .............. 118
Marvel ....................... 118
Marvel Holdings .............. 118
Marvel III ................... 118
Marvel Parent ................ 118
Maryland Acquisition ......... 4
master servicing portfolio .. 4
Maximum Amount ............... 102
Meridian Sports .............. 118
Michigan Branch Sale ......... 28
Mortgage Loan Sale Agreement 102
MSRs ......................... 4
NationsBank .................. 125
New Notes .................... 1
New World .................... 118
New World Television ......... 118
Northeast Branch Sales ....... 28
Note Purchase Agreement ..... 100
Notes ........................ 1
NWCG Holdings ................ 118
NYSE ......................... 71
Offering ..................... 4
Ohio Branch Sale ............. 28
Old FNB ...................... 5
Old FNB Debentures ........... 100
Old FNB Indenture ............ 100
Old Notes .................... 1
OTS .......................... 3
Parity Obligation ............ 142
Participants ................. 121
participants ................. 149
Payment Blockage Period ..... 136
PCT .......................... 118
principal .................... 143
Protective Advances .......... 102
Purchased Assets ............. 107
Put Agreement ................ 5
Put Option ................... 102
Putable Assets ............... 21
QIBs ......................... 125
Refinancing Costs ............ 130
Registration Agreement ....... 1
Registration Statement ....... 2
Restricted Payment ........... 144
Revlon ....................... 118
Revlon Products .............. 118
Revlon Worldwide ............. 118
SAIF ......................... 3
San Francisco Federal ........ 4
SEC .......................... 1
Securities Act ............... 1
Securities Payment ........... 145
Senior Indebtedness .......... 145
Senior Notes ................. 6
Senior Notes Indenture ....... 10
Services Agreement ........... 125
SFAS ......................... 21
SFFed ........................ 4
SFFed Acquisition ............ 4
SFFed Notes .................. 27
Shared Gains ................. 76
Sonoma Purchase .............. 4
Special Report ............... 21
StanFed ...................... 26
Stockholders Agreement ....... 125
Subordinated Obligation ..... 146
sub-servicing portfolio ..... 26
Tax Sharing Agreement ........ 23
Texas Closed Banks ........... 5
TCOF ......................... 48
TIA .......................... 72
Tiburon Purchase ............. 4
Tier 1 association ........... 114
Tier 2 association ........... 114
Tier 3 association ........... 114
TNIS ......................... 124
Toy Biz ...................... 118
Treasury Rate ................ 128
Trustee ...................... 2
</TABLE>
155
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
First Nationwide Holdings Inc. and Subsidiaries
At December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and
1993:
Independent Auditors' Report .............................................. F-2
Consolidated Statements of Financial Condition ............................ F-3
Consolidated Statements of Operations ..................................... F-4
Consolidated Statements of Stockholders' Equity ........................... F-5
Consolidated Statements of Cash Flows ..................................... F-6
Notes to Consolidated Financial Statements ................................ F-8
The FNB Acquired Business
At December 31, 1993 and for the years ended December 31, 1993 and 1992:
Report of Independent Accountants ......................................... F-49
Consolidated Statements of Financial Condition ............................ F-50
Consolidated Statements of Operations ..................................... F-51
Consolidated Statements of Equity ......................................... F-52
Consolidated Statements of Cash Flows ..................................... F-53
Notes to Consolidated Financial Statements ................................ F-55
SFFed Corp. and Subsidiaries
At December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and
1993:
Independent Auditors' Report .............................................. F-82
Consolidated Statements of Financial Condition ............................ F-83
Consolidated Statements of Operations ..................................... F-84
Consolidated Statements of Stockholders' Equity ........................... F-85
Consolidated Statements of Cash Flows ..................................... F-86
Notes to Consolidated Financial Statements ................................ F-88
Unaudited Pro Forma Financial Data of the Issuer
Pro Forma Condensed Combined Statement of Financial Condition at
December 31, 1995 ......................................................... P-2
Notes to Pro Forma Condensed Combined Statement of Financial Condition ... P-3
SFFed Acquisition and notes thereto ....................................... P-4
LMUSA 1996 Purchase and notes thereto ..................................... P-7
Pro Forma Condensed Combined Statement of Operations for the year ended
December 31, 1995 ......................................................... P-9
Notes to Pro Forma Condensed Combined Statement of Operations ........... P-10
SFFed Acquisition and notes thereto ...................................... P-11
LMUSA Purchases and notes thereto ........................................ P-15
Branch Sales and notes thereto ........................................... P-17
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
First Nationwide Holdings Inc.:
We have audited the accompanying consolidated statements of financial
condition of First Nationwide Holdings Inc. and subsidiaries (the "Company")
as of December 31, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Nationwide Holdings Inc. and subsidiaries as of December 31, 1995 and 1994,
and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights," in 1995, and No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," in 1994 and No. 109, "Accounting for Income
Taxes" in 1993.
KPMG PEAT MARWICK LLP
Dallas, Texas
March 8, 1996
F-2
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1995 and 1994
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1995 1994
---------- -------------
<S> <C> <C>
ASSETS
Cash and amounts due from banks .................................. $ 154,758 $ 149,564
Interest-bearing deposits in other banks ......................... 32,778 39,219
Short-term investment securities ................................. 125,035 --
----------- -------------
Cash and cash equivalents ....................................... 312,571 188,783
Securities available for sale .................................... 1,826,075 45,000
Securities to be held to maturity (fair value $1,455 in 1995
and $409,398 in 1994) ........................................... 1,455 411,859
Mortgage-backed securities to be held to maturity (fair value
$1,567,197 in 1995 and $3,095,994 in 1994) ...................... 1,524,488 3,153,812
Loans held for sale, net ......................................... 1,203,412 26,354
Loans receivable, net ............................................ 8,831,018 9,966,886
Covered assets, net .............................................. 39,349 311,603
Investment in Federal Home Loan Bank System ("FHLB") ............ 109,943 128,557
Office premises and equipment, net ............................... 93,509 76,523
Foreclosed real estate, net ...................................... 48,535 37,369
Accrued interest receivable ...................................... 100,604 87,706
Core deposit and other intangible assets ......................... 18,606 12,217
Mortgage servicing rights ........................................ 241,355 86,840
Other assets ..................................................... 295,325 150,050
----------- -------------
Total assets ................................................... $14,646,245 $14,683,559
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ......................................................... $ 10,241,628 $ 9,196,656
Securities sold under agreements to repurchase ................... 969,510 1,883,490
Borrowings ....................................................... 2,392,862 2,808,979
Other liabilities ................................................ 279,099 140,832
----------- -------------
Total liabilities .............................................. 13,883,099 14,029,957
----------- -------------
Minority interest--preferred stock of First Nationwide Bank ..... 300,730 300,730
Stockholders' equity:
Class A common stock, $1.00 par value, 800 shares
authorized, 800 shares issued and outstanding .................. 1 1
Class B common stock, $1.00 par value, 200 shares
authorized, 200 shares issued and outstanding .................. -- --
Class C common stock, $1.00 par value, 250 shares
authorized, 169.5 and 230.3 shares issued and outstanding
at December 31, 1995 and 1994, respectively .................... -- --
Additional paid-in capital ...................................... 223,000 283,801
Net unrealized holding gain on securities available for sale ... 63,512 11,000
Retained earnings (substantially restricted) .................... 175,903 58,070
----------- -------------
Total stockholders' equity ..................................... 462,416 352,872
----------- -------------
Total liabilities and stockholders' equity ..................... $14,646,245 $14,683,559
=========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1995, 1994 and 1993
(in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans receivable ......................................... $ 799,607 $212,553 $ 15,766
Mortgage-backed securities ............................... 212,880 43,015 6,028
Covered assets ........................................... 10,705 29,991 49,128
Loans held for sale ...................................... 24,257 583 --
Securities and interest-bearing deposits in other banks . 28,396 6,997 24,342
--------- ---------- ----------
Total interest income ................................... 1,075,845 293,139 95,264
--------- ---------- ----------
Interest expense:
Deposits ................................................. 447,359 100,957 55,410
Securities sold under agreements to repurchase .......... 104,957 18,863 805
Borrowings ............................................... 182,499 80,025 18,513
--------- ---------- ----------
Total interest expense .................................. 734,815 199,845 74,728
--------- ---------- ----------
Net interest income ..................................... 341,030 93,294 20,536
Provision for loan losses ................................. 37,000 6,226 1,402
--------- ---------- ----------
Net interest income after provision for loan losses .... 304,030 87,068 19,134
--------- ---------- ----------
Noninterest income:
Loan servicing fees, net ................................. 70,265 10,042 8,868
Customer banking fees and service charges ................ 47,493 10,595 2,863
Management fees .......................................... 15,141 13,121 7,855
Gain (loss) on sale of assets ............................ 147 (152) 24,188
Gain on sales of branches ................................ -- -- 140,877
Other income ............................................. 17,927 7,552 6,225
---------- ---------- ----------
Total noninterest income ................................ 150,973 41,158 190,876
---------- ---------- ----------
Noninterest expense:
Compensation and employee benefits ....................... 154,288 48,846 24,951
Occupancy and equipment .................................. 49,897 12,247 5,343
Data processing .......................................... 9,787 2,888 3,739
Savings Association Insurance Fund deposit insurance
premium ................................................. 22,262 6,813 3,259
Marketing ................................................ 10,810 3,385 166
Loan expense ............................................. 12,431 1,132 388
Foreclosed real estate operations, net ................... (927) (528) (726)
Amortization of core deposit and other intangible assets 1,474 222 468
Other .................................................... 72,531 21,293 25,804
---------- ---------- ----------
Total noninterest expense ............................... 332,553 96,298 63,392
---------- ---------- ----------
Income before income taxes, extraordinary item and
minority interest ........................................ 122,450 31,928 146,618
Income taxes .............................................. (57,185) 2,558 2,500
---------- ---------- ----------
Income before extraordinary item and minority interest ... 179,635 29,370 144,118
Extraordinary item--gain on early extinguishment of FHLB
advances, net ............................................ 1,967 1,376 --
---------- ---------- ----------
Income before minority interest ........................... 181,602 30,746 144,118
Minority interest--First Nationwide Bank preferred stock
dividends ................................................ 34,584 -- --
---------- ---------- ----------
Net income .............................................. $ 147,018 $ 30,746 $144,118
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------
CLASS A CLASS B CLASS C
--------- --------- ---------
<S> <C> <C> <C>
Balance at January 1, 1993 ... $1 -- --
Net income .................... -- -- --
Redemption of preferred stock -- -- --
Dividends and distributions to
stockholders ................. -- -- --
--------- --------- ---------
Balance at December 31, 1993 . 1 -- --
Net income .................... -- -- --
Issuance of class C common
stock ........................ -- -- --
Issuance of the Bank's
preferred stock .............. -- -- --
Change in net unrealized
holding gain on securities
available for sale ........... -- -- --
--------- --------- ---------
Balance at December 31, 1994 . 1 -- --
Net income .................... -- -- --
Redemption of class C common
stock ........................ -- -- --
Dividends on class C common
stock ........................ -- -- --
Change in net unrealized
holding gain on securities
available for sale ........... -- -- --
--------- --------- ---------
Balance at December 31, 1995 . $1 -- --
========= ========= =========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NET UNREALIZED
ADDITIONAL HOLDING GAIN ON TOTAL
PAID-IN SECURITIES AVAILABLE RETAINED STOCKHOLDERS'
CAPITAL FOR SALE EARNINGS EQUITY
------------ -------------------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance at January 1, 1993 ... $ 401,569 -- $ 71,206 $ 472,776
Net income .................... -- -- 144,118 144,118
Redemption of preferred stock (124,500) -- -- (124,500)
Dividends and distributions to
stockholders ................. (191,500) -- (188,000) (379,500)
------------ -------------------- ----------- ---------------
Balance at December 31, 1993 . 85,569 -- 27,324 112,894
Net income .................... -- -- 30,746 30,746
Issuance of class C common
stock ........................ 210,376 -- -- 210,376
Issuance of the Bank's
preferred stock .............. (12,144) -- -- (12,144)
Change in net unrealized
holding gain on securities
available for sale ........... -- $11,000 -- 11,000
------------ -------------------- ----------- ---------------
Balance at December 31, 1994 . 283,801 11,000 58,070 352,872
Net income .................... -- -- 147,018 147,018
Redemption of class C common
stock ........................ (60,801) -- -- (60,801)
Dividends on class C common
stock ........................ -- -- (29,185) (29,185)
Change in net unrealized
holding gain on securities
available for sale ........... -- 52,512 -- 52,512
------------ -------------------- ----------- ---------------
Balance at December 31, 1995 . $ 223,000 $63,512 $ 175,903 $ 462,416
============ ==================== =========== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994 and 1993
(in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................... $ 147,018 $ 30,746 $ 144,118
Adjustments to reconcile net income to net cash
used in operating activities:
Adjustments related to the BAC Sale:
Write-off of excess cost over fair value of net
assets acquired .................................. -- -- 59,506
Write-off of purchase premiums and discounts for
assets and liabilities sold ...................... -- -- (49,013)
Net premium on liabilities sold ................... -- -- (141,215)
Net premium on assets sold ........................ -- -- (17,363)
Other adjustments ................................. -- -- 7,208
Amortization of core deposit and other intangible
assets ............................................ 1,474 222 468
(Accretion) amortization of premiums and
discounts, net .................................... (5,491) 3,156 1,545
Amortization of mortgage servicing rights ......... 33,892 3,604 2,259
Provision for accrued termination and facilities
costs ............................................. 12,772 -- --
Provision for loan losses .......................... 37,000 6,226 1,402
Loss (gain) on sales of assets ..................... 17,755 158 (24,373)
Gain on sales of foreclosed real estate ............ (3,010) (728) (1,864)
Extraordinary gain on early extinguishment of
FHLB advances ..................................... (1,967) (1,376) --
Depreciation and amortization ...................... 9,650 2,725 2,118
FHLB stock dividend ................................ (6,951) (3,188) (1,433)
Capitalization of originated mortgage servicing
rights and excess servicing fees receivable ...... (17,902) -- --
Purchases and originations of loans held for sale . (1,773,437) (40,284) --
Proceeds from the sale of loans held for sale ..... 1,191,281 47,227 --
Increase in other assets ........................... (75,273) (64,217) (65,242)
(Increase) decrease in accrued interest receivable (9,743) 759 752
Increase (decrease) in other liabilities .......... 12,619 (22,224) 38,640
----------- ------------- -------------
Total adjustments ................................. (577,331) (67,940) (186,605)
----------- ------------- -------------
Net cash flows used in operating activities ...... (430,313) (37,194) (42,487)
----------- ------------- -------------
Cash flows from investing activities:
Acquisitions and divestitures:
Maryland Acquisition and Lomas 1995 Purchase ...... (214,727) -- --
Branch Acquisitions ................................ 501,351 -- --
FN Acquisition ..................................... -- (526,813) --
Illinois Branch Sale ............................... -- 31,263 --
BAC Sale ........................................... -- -- (471,998)
Purchases of securities available for sale ......... -- 5,939 --
Proceeds from sales of securities available for sale -- 5,939 --
Purchases of securities held to maturity ............ (157,962) (152,068) (3,473,977)
F-6
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31, 1995, 1994 and 1993
(in thousands)
1995 1994 1993
----------- ------------- -------------
Proceeds from maturities of securities held to
maturity ........................................... $ 344,475 $ 108,754 $ --
Purchases of mortgage-backed securities available
for sale ........................................... -- (5,758) --
Proceeds from sales of mortgage-backed securities
available for sale ................................. -- 5,758 --
Purchases of mortgage-backed securities held to
maturity ........................................... (19,825) (58,125) (454,327)
Principal payments on mortgage-backed securities
held to maturity ................................... 570,607 177,926 159,925
Proceeds from sales of mortgage-backed securities
held to maturity ................................... -- -- 80,205
Proceeds from sales of loans receivable ............. 431,247 154,638 300,156
Net increase in loans receivable .................... (86,193) (69,025) (38,149)
Decrease in covered assets .......................... 272,254 279,930 243,355
Redemptions of FHLB stock, net of purchases ........ 25,565 28,281 --
Purchases of office premises and equipment ......... (15,331) (2,555) (1,251)
Proceeds from the disposal of office premises and
equipment .......................................... 1,667 1,427 --
Proceeds from sales of foreclosed real estate ...... 71,453 25,763 8,182
Purchase of mortgage servicing rights ............... (774) (444) (1,728)
------------- ------------ -------------
Net cash flows (used in) provided by investing
activities ........................................ 1,723,807 (1,048) (3,649,607)
Cash flows from financing activities:
Net increase (decrease) in deposits ................. 542,633 (83,851) (432,464)
Proceeds from additional borrowings ................. 6,151,319 1,472,160 112,100
Principal payments on borrowings .................... (6,860,569) (2,239,248) (138,874)
Net (decrease) increase in securities sold under
agreements to repurchase ........................... (913,103) 534,998 119,144
Issuance of class C common stock .................... -- 210,376 --
Redemption of class C common stock .................. (60,801) -- --
Dividends on class C common stock ................... (29,185) -- --
Minority interest--issuance of First Nationwide
preferred stock .................................... -- 288,586 --
Redemption of preferred stock ....................... -- -- (124,500)
------------- ------------ -------------
Dividends ........................................... -- -- (136,210)
Net cash transferred through dividend of First
Gibraltar Mortgage Holdings ........................ -- -- (4,295)
Net cash flows provided by (used in) financing
activities ........................................ (1,169,706) 183,021 (605,099)
------------ -------------
Net change in cash and cash equivalents .............. 123,788 144,779 (4,297,193)
Cash and cash equivalents at beginning of year ...... 188,783 44,004 4,341,197
------------- ------------ -------------
Cash and cash equivalents at end of year ............. $ 312,571 $ 188,783 $ 44,004
============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
First Nationwide Holdings Inc. (the "Company" or "FN Holdings") is a
holding company whose only significant asset is all of the outstanding shares
of common stock of First Nationwide Bank, A Federal Savings Bank, formerly
First Madison Bank, FSB ("First Madison") ("First Nationwide" or "Bank"). The
Company is a subsidiary of First Nationwide (Parent) Holdings Inc. ("Parent
Holdings"), which is a subsidiary of First Gibraltar Holdings Inc. ("First
Gibraltar Holdings"), an indirect subsidiary of MacAndrews & Forbes Holdings
Inc. ("M&F Holdings").
First Nationwide was organized and chartered as First Gibraltar Bank, FSB
(First Gibraltar), a Federal stock savings bank in December 1988 for the
primary purpose of acquiring substantially all of the assets and assuming
deposit, secured and certain other liabilities of five insolvent Texas
savings and loan associations ("Closed Associations") from the Federal
Savings and Loan Insurance Corporation ("FSLIC"), as receiver. On August 9,
1989, the FSLIC was abolished and its obligations and rights were assumed by
the FSLIC Resolution Fund ("FSLIC/RF").
Acquisition of the Closed Associations was made pursuant to five
substantially similar acquisition agreements and an assistance agreement
("Assistance Agreement") among the FSLIC/RF, First Gibraltar, First Gibraltar
Holdings and M&F Holdings, and became effective on December 28, 1988. Both
First Gibraltar Holdings and M&F Holdings are indirect parents of First
Nationwide. Assets subject to the Assistance Agreement are known as "Covered
Assets." The Assistance Agreement generally provides for guaranteed yield
amounts to be paid on the book value of the Covered Assets, and pays First
Nationwide for 90% of the losses incurred upon disposition of the Covered
Assets ("Capital Loss Provision"). The remaining 10% not reimbursed, net of
10% of all asset recoveries and certain agreed-upon Covered Asset disposition
fees ("Shared Gain"), is known as the "FSLIC/RF Reimbursement". In January
1992, certain provisions of the Assistance Agreement were renegotiated and
amended or modified.
On February 1, 1993, First Gibraltar sold to BankAmerica Corporation
certain assets, liabilities and substantially all of the branch operations of
First Gibraltar located in Texas, including $829 million of loans and 130
branches with approximately $6.9 billion in deposits (the "BAC Sale"). A net
gain of $141 million was recorded in connection with this sale. Subsequent to
the BAC Sale, First Gibraltar changed its name to First Madison and its
principal business consisted of funding the Covered Assets and the
performance of its obligations under the Assistance Agreement.
On April 14, 1994, First Madison entered into the Asset Purchase Agreement
(the "Asset Purchase Agreement") with First Nationwide Bank, A Federal
Savings Bank ("Old FN"), an indirect subsidiary of Ford Motor Company ("Ford
Motor"). On October 3, 1994, effective immediately after the close of
business on September 30, 1994, First Madison acquired substantially all of
the assets and certain of the liabilities (the "FN Acquired Business") of Old
FN (the "FN Acquisition") for approximately $715 million based on estimates
prepared by Old FN. On March 2, 1995, an additional $11.5 million was paid to
Old FN pursuant to certain settlement provisions of the Asset Purchase
Agreement. Effective on October 1, 1994, First Madison changed its name to
First Nationwide.
Following the FN Acquisition, First Nationwide's principal business
consists of operating retail deposit branches and originating and/or
purchasing one- to four-family real estate mortgage loans and, to a lesser
extent, certain consumer loans. First Nationwide actively manages its
portfolio of commercial real estate loans acquired through acquisitions and
is also active in mortgage banking and loan servicing. These operating
activities are financed principally with customer deposits, secured
short-term and long-term borrowings, collections on loans and mortgage-backed
securities, asset sales and retained earnings.
During 1995, the FSLIC/RF exercised its right under the Assistance
Agreement to purchase substantially all of the remaining Covered Assets at
the fair market value of such assets (the "FDIC Purchase"). Under the Capital
Loss Provision, losses sustained by First Nationwide from these actions are
reimbursed by the FSLIC/RF and therefore no gain or loss was recorded on the
sale of these assets to the Federal Deposit Insurance Corporation ("FDIC").
F-8
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS
The following represent acquisitions consummated during 1995. In addition,
the Bank has executed various contracts in 1995 for the acquisition of other
thrift institutions and mortgage loan servicing operations, and for the sale
of a significant portion of the retail deposit operations outside California,
as further described in note 34.
FN Acquisition
The FN Acquisition was accounted for as a purchase and, accordingly, the
purchase price was allocated to assets and liabilities based on estimates of
fair values at October 3, 1994. Since October 3, 1994, the results of
operations of the FN Acquired Business have been included in First
Nationwide's consolidated statements of operations.
The following is a summary of the assets acquired and liabilities assumed
in connection with the FN Acquisition at October 3, 1994 (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
REMAINING
OLD FN FAIR VALUE FIRST NATIONWIDE LIVES (IN
CARRYING VALUE ADJUSTMENTS CARRYING VALUE YEARS)
-------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C>
Securities .................................... $ 355,760 $ (3,989) $ 351,771 1 to 5
Mortgage-backed securities .................... 1,615,183 (30,516) 1,584,667 6 to 9
Loans held for sale ........................... 33,527 (72) 33,455 --
Loans receivable, net ......................... 11,395,622 6,651 11,402,273 2 to 18
Investment in FHLB ............................ 111,654 -- 111,654 --
Offices premises and equipment ................ 98,075 (13,166) 84,909 3 to 10
Foreclosed real estate, net ................... 48,188 (4,032) 44,156 --
Accrued interest receivable ................... 86,361 -- 86,361 2 to 7
Cost of mortgage servicing rights, net ....... 50,718 39,282 90,000 2 to 4
Other assets .................................. 82,186 67,304 149,490 2 to 5
Deposits ...................................... (10,047,911) (25,607) (10,073,518) 1 to 5
Securities sold under agreement to repurchase (1,229,296) (416) (1,229,712) --
Borrowings .................................... (2,012,574) 33,765 (1,978,809) 1 to 17
Other liabilities ............................. (106,073) (36,250) (142,323) 1 to 5
-------------- ------------- ----------------
481,420 32,954 514,374
Cash and cash equivalents ..................... 188,109 -- 188,109
-------------- ------------- ----------------
$ 669,529 $ 32,954 702,483
============== ============= ----------------
Purchase price paid at closing ................ 714,922
----------------
Excess cost over fair value of net assets
acquired ..................................... $ 12,439
================
</TABLE>
The amount paid at closing was based on an estimated purchase price
prepared by Old FN. This estimate was subsequently adjusted, and an
additional $11.5 million, plus interest, was paid to Old FN on March 2, 1995.
As a result of this additional amount paid and other revisions to the
original fair value estimates, the excess of cost over fair value of net
assets acquired was reduced to $6.5 million.
The Bank financed the FN Acquisition and paid related fees and expenses
with (i) a capital contribution by FN Holdings, funded with the net proceeds
of (a) the issuance by FN Holdings of its 12 1/4% Senior Notes due 2001
("Senior Notes"), and (b) the issuance of FN Holdings' class C common stock
to Parent Holdings, (ii) the net proceeds from the issuance of 3,007,300
shares of the Bank's 11 1/2% Noncumulative Perpetual Preferred Stock
("Preferred Stock"), and (iii) existing cash and proceeds from securities
sold under agreements to repurchase.
F-9
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On October 7, 1994, First Nationwide sold the FN Acquired Business'
branch network in Illinois, with approximately $1.2 billion in deposits, to
Household Bank, f.s.b. (the "Illinois Sale"). The Illinois Sale was funded
with approximately $1.2 billion in borrowings and did not result in any gain
or loss. The following is a summary of the Bank's carrying value of the
assets and liabilities of the branch operations in the Illinois Sale date of
sale (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Office premises and equipment ......... $ 10,293
Core deposit intangible (other assets) 89,726
Deposits .............................. (1,218,758)
============
</TABLE>
The following pro forma financial information combines the historical
results of the Company and the Acquired Business as if the FN Acquisition and
the Branch Sale had occurred as of the beginning of each year presented. The
pro forma results are not necessarily indicative of the results which would
have actually been obtained if the FN Acquisition and the Branch Sale had
been consummated in the past nor do they project the results of operations in
any future period (in thousands) (unaudited):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1994 1993
---------- ----------
<S> <C> <C>
Net interest income $385,313 $489,204
Net income ......... 77,397 150,946
========== ==========
</TABLE>
Maryland Acquisition
On February 28, 1995, the Bank's wholly owned mortgage bank operating
subsidiary, First Nationwide Mortgage Corporation ("FNMC") acquired the
mortgage servicing operations of the former Standard Federal Savings
Association in Frederick, Maryland for approximately $178 million (the
"Maryland Acquisition"). As a result of this transaction, the Bank acquired
certain assets and liabilities and a loan servicing portfolio of
approximately $11.4 billion (including a subservicing portfolio of $1.8
billion). The transaction was accounted for as a purchase. Accordingly, the
accompanying consolidated statement of operations for the period ended
December 31, 1995 includes the results of the acquired mortgage servicing
operations for the period since March 1, 1995.
Branch Acquisitions
In April 1995, First Nationwide acquired approximately $13 million in
deposits located in Tiburon, California, from East-West Federal Bank, a
federal savings bank (the "Tiburon Purchase"). In August 1995, the Bank
acquired three retail branches located in Orange County, California with
deposit accounts totalling approximately $356 million from ITT Federal Bank,
fsb, (the "ITT Purchase"). On December 8, 1995, the bank acquired four retail
branches located in Sonoma County, California with deposit accounts of
approximately $144 million from Citizens Federal Bank, a Federal Savings Bank
(the "Sonoma Purchase" and, collectively with the Tiburon Purchase and the
ITT Purchase, the "Branch Acquisitions"). The aggregate amounts received from
the sellers in the Branch Acquisitions totalled $501 million.
Lomas 1995 Purchase
In September 1995, FNMC entered into an agreement to purchase a portion of
Lomas Mortgage USA, Inc.'s ("LMUSA") loan servicing portfolio of
approximately $11.1 billion (including a sub-servicing portfolio of $3.1
billion), a master servicing portfolio of $2.9 billion and other assets,
principally existing loans, loan production operations and ownership of Lomas
Mortgage Services Inc. from LMUSA, a subsidiary of Lomas Financial
Corporation, for $100 million, payable in installments, and the assumption of
the certain indebtedness relating to the acquired loan portfolio totalling
approximately $274 million (the "Lomas 1995 Purchase"). This transaction
closed on October 2, 1995, and FNMC made the first installment totalling $35
million from existing cash. At December 31, 1995, approximately $64.7 million
F-10
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
remains payable to LMUSA and bears interest at the average federal funds rate
plus 1%. The transaction was accounted for as a purchase. Accordingly, the
accompanying consolidated financial statements of operations include the
results of the acquired operations since October 2, 1995.
Pro froma financial information for the Maryland and Branch Acquisitions
and the Lomas 1995 Purchase has not been presented because such information
is not considered material to the consolidated financial statements.
Purchase Accounting Adjustments
Premiums and discounts related to interest-earning assets acquired and
interest-bearing liabilities assumed are amortized (accreted) to operations
using the level yield method over the estimated remaining lives of the
respective assets and liabilities. Premiums and discounts relative to
noninterest- earning assets and noninterest-bearing liabilities are amortized
(accreted) to operations using the straight-line method over the estimated
useful lives.
Income before income taxes, extraordinary item and minority interest for
the years ended December 31, 1995 and 1994 included net amortization
(accretion) of premiums (discounts) of $.9 million and $.6 million,
respectively, which resulted from the application of purchase accounting
relative to interest-earning assets and interest-bearing liabilities assumed
in the FN, Maryland and Branch Acquisitions, and the Lomas 1995 Purchase.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of FN Holdings conform to generally
accepted accounting principles and general practices within the savings and
loan industry. The following summarizes the more significant of these
policies.
(a) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of FN Holdings, the Bank and the Bank's wholly owned subsidiaries
not subject to the Assistance Agreement. Earnings per share data is not
presented due to the limited ownership of the Company (see note 23). All
significant intercompany accounts and transactions have been eliminated.
Investments in and advances to directly-held subsidiaries at December
28, 1988 are Covered Assets under the provisions of the Assistance
Agreement. Therefore, all significant activity regarding additional
investments and dispositions is subject to FSLIC/RF approval. Because
control over such subsidiaries does not rest solely with First Nationwide
and ownership is temporary in management's view, the assets and
liabilities and results of operations of these entities are not
consolidated in the accompanying consolidated financial statements. The
investments in these subsidiaries, including advances, are recorded as
Covered Assets at their guaranteed values.
(b) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and
cash equivalents include cash and amounts due from banks, interest-bearing
deposits in other banks and securities purchased under agreements to
resell with original maturities of three months or less. Savings and loans
are required by the Federal Reserve Bank to maintain noninterest-bearing
cash reserves equal to a percentage of certain deposits. The reserve
balance for First Nationwide at December 31, 1995 was $53.6 million.
(c) Securities and Mortgage-backed Securities
The Company's investment in securities consists primarily of U.S.
Government and agency securities and mortgage-backed securities. FN
Holdings adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"), which specifies the accounting and reporting for all investments in
debt securities and for
F-11
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
investments in equity securities that have readily determinable fair
values, effective January 1, 1994. There was no material impact on the
consolidated financial statements as a result of the adoption of SFAS 115
at January 1, 1994. SFAS 115 requires classification of debt and equity
securities, including mortgage-backed securities, into one of three
categories: to be held to maturity, available for sale or trading
securities. Securities expected to be held to maturity represent
securities which management has the positive intent and ability to hold to
maturity and are reported at amortized cost. Securities bought and held
principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings. All other securities are
classified as available for sale and carried at fair value, with
unrealized holding gains and losses, net of tax, reported as a separate
component of stockholders' equity until realized. Should an other than
temporary decline in the fair value of a security classified as held to
maturity or available for sale occur, the carrying value of such security
would be written down to fair value by a charge to operations. Realized
gains or losses on available for sale securities are computed on a
specific identification basis and are accounted for on a trade-date basis.
The Financial Accounting Standards Board ("FASB") issued a Special
Report in November 1995, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" (the
"Special Report"). The Special Report provided all entities an opportunity
to reassess their ability and intent to hold securities to maturity and
allowed a one time reclassification of securities from held-to-maturity to
available-for-sale without "tainting" the remaining held-to-maturity
securities. On December 29, 1995, the Company reclassified $1.5 billion
and $231.8 million in carrying value of mortgage-backed securities and
U.S. government and agency securities, respectively, from the respective
held-to-maturity categories to securities available for sale.
Amortization and accretion of premiums and discounts relating to
mortgage-backed securities is recognized using the interest method over
the estimated lives of the underlying mortgages with adjustments based on
prepayment experience.
(d) Loans Held for Sale, Net
One- to four-family residential mortgage loans originated and intended
for sale in the secondary market and other loans which are expected to be
sold in the near term are carried at the lower of cost or market value as
determined by outstanding commitments from investors or current investor
yield requirements calculated on an aggregate basis. Net unrealized losses
are recognized in a valuation allowance by charges to income.
(e) Loans Receivable, Net
Loans receivable, net, is stated at unpaid principal balances, less
the allowance for loan losses, and net of deferred loan-origination fees
and purchase discounts.
Discounts on one- to four-family residential mortgage loans are
amortized to income using the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments. Discounts on
consumer and other loans are recognized over the lives of the loans using
the interest method.
A significant portion of First Nationwide's real estate loan portfolio
is comprised of adjustable- rate mortgages. The interest rate and payment
terms of these mortgages adjust on a periodic basis in accordance with
various published indices. The majority of these adjustable-rate mortgages
have terms which limit the amount of interest rate adjustment that can
occur each year and over the life of the mortgage. During periods of
limited payment increases, negative amortization may occur on certain
adjustable-rate mortgages. See Note 30
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on
F-12
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Bank's past loan loss experience, delinquency trends, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions. As management utilizes
information currently available to make such evaluation, the allowance for
loan losses is subjective and may be adjusted in the future depending on
changes in economic conditions or other factors. Additionally, regulatory
authorities, as an integral part of their regular examination process,
review the Bank's allowance for estimated losses on a periodic basis.
These authorities may require the Bank to recognize additions to the
allowance based on their judgments of information available to them at the
time of their examination.
Uncollectible interest on loans that are contractually ninety days or
more past due is charged off, or an allowance is established based on
management's periodic evaluation. The allowance is established by a charge
to interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent that cash payments are
received. When, in management's judgment, the borrower's ability to make
periodic interest and principal payments returns, the loan is returned to
accrual status.
(f) Impaired Loans
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan" ("SFAS No. 114"), as amended by Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures" ("SFAS No. 118"). Under SFAS no.
114, a loan is impaired when it is "probable" that a creditor will be
unable to collect all amounts due (i.e., both principal and interest)
according to the contractual terms of the loan agreement. The measurement
of impairment may be based on (i) the present value of the expected future
cash flows of the impaired loan discounted at the loan's original
effective interest rate, (ii) the observable market price of the impaired
loan, or (iii) the fair value of the collateral of a collateral-dependent
loan. SFAS No. 114 does not apply to large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment. For FN
Holdings, loans collectively reviewed for impairment include all
single-family loans, and performing multi-family and commercial real
estate loans under $500,000, excluding loans which have entered the
workout process. The adoption of SFAS No. 114, as amended by SFAS No. 118,
had no material impact on the Company's consolidated financial statements
as the Company's existing policy of measuring loan impairment was
consistent with methods prescribed in these standards.
The Company considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Company will
be unable to collect all amounts due according to the contractual terms of
the loan agreement. Any insignificant delay (i.e., 60 days or less) or
insignificant shortfall in amount of payments will not cause a loan to be
considered impaired. In determining impairment, FN Holdings considers
large nonhomogeneous loans including nonaccrual loans, troubled debt
restructurings and performing loans which exhibit, among other
characteristics, high loan-to-value ratios, low debt-coverage ratios, or
other indications that the borrowers are experiencing increased levels of
financial difficulty. The Company bases the measurement of collateral-
dependent impaired loans, which represent substantially all of the
Company's loan portfolio, on the fair value of the loan's collateral. The
amount, if any, by which the recorded investment of the loan exceeds the
measure of the impaired loan's value is recognized by recording a
valuation allowance.
Cash receipts on impaired loans not performing according to
contractual terms are generally used to reduce the carrying value of the
loan, unless the Company believes it will recover the remaining principal
balance of the loan. Impairment losses are included in the allowance for
loan losses through a charge to provision for loan losses. Adjustments to
impairment losses due to changes in the fair value of collateral of
impaired loans are included in provision for loan losses. Upon disposition
of an impaired loan, of principal, if any, is recorded through a
charge-off to the allowance for loan losses.
F-13
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(g) Loan Origination and Commitment Fees and Related Costs
Loan origination fees, net of direct underwriting and closing costs,
are deferred and amortized to interest income using the interest method
over the contractual term of the loans, adjusted for actual loan
prepayment experience. Unamortized fees on loans sold or paid in full are
recognized as income. Adjustable-rate loans with lower initial interest
rates during the introductory period result in the amortization of a
substantial portion of the net deferred fee during the introductory
period.
Commitment fees paid to investors, for the right to deliver permanent
residential mortgages in the future to the investors at a specified yield,
are deferred. Amounts are included in the recognition of gain (loss) on
sale of loans as loans are delivered to the investor in proportion to the
percentage relationship of loans delivered to the total commitment amount.
Any unused fee is recognized as an expense at the expiration of the
commitment date, or earlier, if it is determined that the commitment will
not be filled.
Fees received in connection with loan commitments are deferred and
recognized as fee revenue on a straight-line basis over the term of the
commitment. If the commitment is subsequently exercised during the
commitment period, the remaining unamortized commitment fee at the time of
exercise is recognized over the term of the loan as an adjustment to
yield.
Other loan fees and charges, which represent income from the
prepayment of loans, delinquent payment charges, and miscellaneous loan
services, are recognized as income when collected.
(h) Office Premises and Equipment
Land is carried at cost. Premises, equipment and leasehold
improvements are stated at cost, less accumulated depreciation and
amortization. Premises, equipment and leasehold improvements are
depreciated or amortized on a straight-line basis over the lesser of the
lease term or the estimated useful lives of the various classes of assets.
Maintenance and repairs on premises and equipment are charged to expense
in the period incurred.
Closed facilities of the Company and its subsidiaries are carried at
fair value. In the case of leased premises that are vacated by the Bank, a
liability is established representing the difference between the net
present value of future lease payments and the net present value of
anticipated sublease income, if any, for the remaining term of the lease.
(i) Foreclosed Real Estate
Real estate acquired through foreclosures is carried at fair value
less estimated disposal costs at the time of foreclosure. Subsequent to
foreclosure, First Nationwide charges current earnings with a provision
for estimated losses when the carrying value of the collateral property
exceeds its fair value.
(j) Core Deposit and Other Intangible Assets
The core deposit intangible asset is amortized over the estimated
lives of existing deposit relationships. Other intangible assets,
principally excess of cost over fair value of net assets acquired in
business combinations accounted for as a purchase, are amortized on a
straight-line basis over the expected period to be benefited of 15 years.
The Company periodically reviews the operations of the businesses acquired
to determine that income from operations continues to support the
recoverability of its intangible assets and the amortization periods used.
(k) Mortgage Servicing Rights
The Company purchases mortgage servicing rights separately or it may
acquire mortgage servicing rights by purchasing or originating mortgage
loans and selling those loans with servicing rights retained. Generally,
purchased mortgage servicing rights are capitalized at the cost to acquire
F-14
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the rights and are carried at the lower of cost, net of accumulated
amortization, or fair value. Originated mortgage servicing rights are
capitalized based on the relative fair value of the servicing right to the
fair value of the loan and are recorded at the lower of the capitalized
amount, net of accumulated amortization, or fair value.
The Company records mortgage servicing rights at cost, net of
accumulated amortization. Mortgage servicing rights are amortized in
proportion to, and over the period of, estimated net servicing income. The
Company uses a cash flow model to calculate the amortization of mortgage
servicing rights. The amortization of the mortgage servicing rights is
analyzed periodically and is adjusted to reflect changes in prepayment
rates and other estimates.
On May 12, 1995, the FASB issued Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights, an amendment
to Statement No. 65" ("SFAS No. 122"). This statement provides guidance
for the recognition of mortgage servicing rights as an asset when a
mortgage loan is sold and servicing rights are retained. The Company
elected to adopt this standard effective April 1, 1995. The result of the
adoption was to capitalize approximately $17 million in mortgage servicing
rights related to loans originated by the Company in 1995.
SFAS No. 122 requires that a portion of the cost of originating a
mortgage loan be allocated to the mortgage servicing rights based on its
fair value. To determine the fair value of mortgage servicing rights
created since April 1, 1995, the Company uses market prices for comparable
mortgage servicing contracts, when available, or alternatively uses a
valuation model that calculates the present value of future net servicing
income. In using this valuation method, the Company incorporates
assumptions that market participants would use in estimating future net
servicing income, which include estimates of the cost of servicing, the
discount rate, mortgage escrow earnings rate, an inflation rate, ancillary
income, prepayment speeds and default rates and losses.
SFAS No. 122 requires enterprises to measure the impairment of
servicing rights based on the difference between the carrying amount and
current fair value of the servicing rights. In determining impairment, the
Company aggregates all mortgage servicing rights and stratifies them based
on the predominant risk characteristics of interest rate, loan type and
investor type. Further, mortgage servicing rights capitalized prior to the
adoption of SFAS No. 122 were stratified by acquisition to measure
impairment. A valuation allowance is established for any excess of
amortized cost over the current fair value, by risk stratification, by
charge to income.
The carrying value of mortgage servicing rights is amortized over the
life of the related loan portfolio. A decline in long-term interest rates
generally results in an acceleration in mortgage loan prepayments. Higher
levels of prepayments would result in an acceleration of the amortization
of mortgage servicing rights, causing a reduction in the Company's
servicing fee income. Management takes the current and projected interest
rate environment into account in estimating the amount of amortization of
mortgage servicing rights included in the accompanying consolidated
statements of operations. However, further declines in long-term interest
rates could cause the level of prepayments to exceed management's
estimates.
(l) Gains/Losses on Sales of Mortgage Loans
Mortgage loans are generally sold with the mortgage servicing rights
retained by the Company. Effective with the adoption of SFAS No. 122 on
April 1, 1995, the carrying value of mortgage loans sold was reduced by
the cost allocated to the associated mortgage servicing rights. Gains or
losses on sales of mortgage loans are recognized based on the difference
between the selling price and the carrying value of the related mortgage
loans sold. Such gains and losses are adjusted by the amount of excess
servicing fees recorded. Excess servicing exists when the servicing fee on
a mortgage loan sold with servicing retained exceeds a "normal" servicing
fee (typically .25% to .375% per annum of
F-15
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the mortgage loan principal amount.) The gain or loss will be adjusted to
provide for the recognition of a normal service fee rate over the
estimated lives of the loans. Deferred origination fees and expenses, net
of commitment fees paid in connection with the sale of the loans, are
recognized at the time of sale in the gain or loss determination.
(m) Servicing Fee Income
Servicing fee income represents the fees earned for servicing mortgage
loans under servicing agreements with the Federal National Mortgage
Association ("FNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC"), the Government National Mortgage Association ("GNMA"), and
certain private investors. The fees are based on a contractual percentage
of the outstanding principal balance or a fixed amount per loan and are
recorded as income when received. Amortization of capitalized excess
servicing is netted against loan servicing fees to reflect a normal
servicing fee. The amortization of mortgage servicing rights is netted
against servicing fee income.
(n) Interest Rate Swap Agreements
The Bank is a party to various interest rate swap agreements as a
means of managing its interest rate exposure relative to the Bank's FHLB
advances. Amounts receivable or payable under these derivative financial
instruments are recognized as adjustments to interest expense of the
hedged liability (FHLB advances). Gains and losses on early termination of
these agreements are included in the carrying amount of the related
liability and amortized over the remaining terms of the liability.
(o) Income Taxes
For Federal income tax purposes, FN Holdings is a member of the Mafco
Holdings Inc. ("Mafco", the indirect parent of FN Holdings) affiliated
group, and accordingly, its Federal taxable income or loss will be
included in the consolidated Federal income tax return filed by Mafco. FN
Holdings may also be included in certain state and local income tax
returns of Mafco or its subsidiaries. FN Holding's tax sharing agreement
with Mafco provides that income taxes will be based on the separate
results of FN Holdings. The agreement generally provides that FN Holdings
will pay to Mafco amounts equal to the taxes that FN Holdings would be
required to pay if it were to file a return separately from the affiliated
group. Furthermore, the agreement provides that FN Holdings shall be
entitled to take into account any net operating loss carryovers
attributable to taxable periods prior to January 1, 1994 in determining
its tax liability. The agreement also provides that Mafco will pay FN
Holdings amounts equal to tax refunds FN Holdings would be entitled to if
it had always filed a separate company tax return.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. FN Holdings adopted SFAS No. 109,
"Accounting for Income Taxes", effective January 1, 1993 for which there
was no cumulative effect of that change in the method of accounting for
income taxes in the accompanying 1993 consolidated statement of
operations. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(p) Extraordinary Gain from Extinguishment of Debt
During 1995, First Nationwide prepaid $250 million on FHLB advances
resulting in an extraordinary gain of approximately $2.0 million, net of
income taxes, on the early extinguishment of debt. During 1994, the Bank
prepaid $95.2 million in FHLB advances resulting in an extraordinary gain
of approximately $1.4 million, net of income taxes, on the early
extinguishment of debt.
F-16
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(q) Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect (i) the reported amounts of assets and
liabilities, (ii) disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and (iii) the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(r) Reclassification
Certain amounts within the consolidated financial statements have been
reclassified to conform to the current year presentation.
(s) Newly Issued Accounting Pronouncements
In March 1995, the FASB issued Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). SFAS No. 121
provides guidance for recognition and measurement of impairment of
long-lived assets, certain identifiable intangibles and goodwill related
both to assets to be held and used by an entity and assets to be disposed
of. SFAS No. 121 is effective for financial statements for fiscal years
beginning after December 15, 1995. Although the Company has not yet
adopted SFAS No. 121, management does not expect such adoption to have a
material impact on the Company's consolidated financial statements.
(4) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN THOUSANDS)
Cash paid for interest for the years ended December 31, 1995, 1994 and
1993 was $702,254, $184,499 and $84,663, respectively.
During the year ended December 31, 1995, noncash activity consisted of the
reclassification of $1.5 billion and $231.8 million historical carrying value
of mortgage-backed securities and U.S. government and agency securities,
respectively, from the held-to-maturity portfolio to the available-for-sale
portfolio (see note 5). In addition, $326.0 million of consumer loans were
reclassified from loans receivable to loans held for sale, transfers from
loans receivable to foreclosed real estate amounted to $79.6 million, and
$376.3 million was transferred from loans receivable to mortgage-backed
securities to be held to maturity representing the securitization of certain
of the Bank's qualifying single-family loans.
During the year ended December 31, 1994, noncash activity consisted of the
transfer of $21.8 million from loans receivable to foreclosed real estate and
the transfer of $1.3 billion from loans receivable to mortgage-backed
securities to be held to maturity representing the securitization of certain
of the Bank's qualifying single-family loans. The transfer to foreclosed real
estate was net of a $4 million write-down, which was recorded as a receivable
from the FSLIC/RF (other assets), resulting from the expiration of coverage
of a multi-family residential commercial loan.
During the year ended December 31, 1993, noncash activity consisted of the
transfer of $50,950 from loans receivable to mortgage-backed securities, the
transfer of $7,136 from loans held for sale to loans receivable, and the
transfer of $9,604 from Covered Assets to loans receivable due to a
commercial loan which expired from coverage. As discussed in note 2, the Bank
distributed the common stock of a subsidiary, FGMH, to First Gibraltar
Holdings at its carrying value of $99,781. Net cash and cash equivalents
transferred amounted to $4,295. The Bank also dividended office premises and
equipment totalling $943 and securities totalling $142,566 to First Gibraltar
Holdings. As discussed in note 2, the Bank sold substantially all of its
branch operations to BAT during 1993. The excess of liabilities transferred
over assets was $141,215. Net cash and cash equivalents transferred to BAT
amounted to $471,998.
F-17
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) SECURITIES AVAILABLE FOR SALE
At December 31, 1995 and 1994, securities available for sale and the
related unrealized gain or loss consisted of the following (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES
------------ ------------ ------------
<S> <C> <C> <C>
Marketable equity securities .......... $ 34,000 $ 80,068 $ --
Mortgage-backed securities:
GNMA ................................. 14,018 906 --
FNMA ................................. 294,070 5,643 --
FHLMC ................................ 801,393 19,671 (1)
Collateralized mortgage obligations . 345,699 793 (4,678)
U.S. government and agency obligations 231,794 2,768 (69)
------------ ------------ ------------
Total ............................... $1,720,974 $109,849 $(4,748)
============ ============ ============
FDIC portion of unrealized gain on
marketable equity securities .........
Estimated tax effect ..................
Net unrealized holding gain in
stockholders' equity ...............
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NET
UNREALIZED CARRYING
GAIN VALUE
------------ ------------
<S> <C> <C>
Marketable equity securities .......... $ 80,068 $ 114,068
Mortgage-backed securities:
GNMA ................................. 906 14,924
FNMA ................................. 5,643 299,713
FHLMC ................................ 19,670 821,063
Collateralized mortgage obligations . (3,885) 341,814
U.S. government and agency obligations 2,699 234,493
------------ ------------
Total ............................... 105,101 $1,826,075
============ ============
FDIC portion of unrealized gain on
marketable equity securities ......... (34,534)
Estimated tax effect .................. (7,055)
------------
Net unrealized holding gain in
stockholders' equity ............... $ 63,512
============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES
------------ ------------ ------------
<S> <C> <C> <C>
Marketable equity securities $34,000 $11,000 $--
============ ============ ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NET
UNREALIZED CARRYING
GAIN VALUE
------------ -----------
<S> <C> <C>
Marketable equity securities $11,000 $45,000
============ ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------
WEIGHTED
AMORTIZED CARRYING AVERAGE
COST VALUE YIELD
------------ ------------ ----------
<S> <C> <C> <C>
Marketable equity securities ............. $ 34,000 $ 114,068 --
Mortgage-backed securities ............... 1,455,180 1,477,514 7.41%
U.S. government and agency obligations:
Maturing within 1 year .................. 62,054 62,093 5.70
Maturing after 1 year but within 5 years 169,676 172,336 6.98
Maturing after 5 years through 10 years 64 64 7.25
------------ ------------ ----------
Total .................................. $1,720,974 $1,826,075 7.16%
============ ============ ==========
</TABLE>
As discussed more fully in note 3, the FASB issued the Special Report
which provided all entities an opportunity to reassess their ability and
intent to hold securities to maturity and allowed a one-time reclassification
of securities from held-to-maturity to available-for-sale without "training"
the remaining held-to-maturity securities. On December 29, 1995, the Bank
reclassified $1.5 billion and $231.8 million in carrying value of
mortgage-backed securities and U.S. government and agency securities,
respectively, from held to maturity to securities available for sale. This
reclassification resulted in a net after-tax increase in the unrealized gain
account in stockholders' equity of $22.5 million.
Proceeds on sales of mortgage-backed securities available for sale during
1994 totalled $6 million. No realized gain or loss was recognized on such
sales.
At December 31, 1995, mortgage-backed securities available for sale
included securities totalling $63.4 million which resulted from the
securitization of certain qualifing mortgage loans from First Nationwide's
loan portfolio.
F-18
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1995, mortgage-backed securities available for sale
included $979.0 million of variable-rate securities.
U.S. government and agency obligations and mortgage-backed securities
available for sale of $50 million and $39 million, respectively, were pledged
as collateral for various obligations as further discussed in note 30.
Marketable equity securities available for sale represents approximately
25% of the outstanding common stock of Affiliated Computer Services ("ACS"),
representing 5% of the voting power, with an original cost basis of $34
million. Pursuant to the terms of a settlement agreement dated June 17, 1991
between the Company, ACS, and the FDIC, the FDIC is entitled to share in a
defined portion of the proceeds from the sale of the stock, which, at
December 31, 1995 and 1994, approximated $34.5 million and $0, respectively,
and which is recorded in other liabilities.
(6) SECURITIES TO BE HELD TO MATURITY
At December 31, 1995 and 1994, securities to be held to maturity consist
of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Municipal securities $1,455 $-- $-- $1,455
=========== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
U. S. government and agency obligations $410,211 $51 $2,524 $407,738
Municipal securities ................... 1,648 12 -- 1,660
----------- ------------ ------------ ------------
$411,859 $63 $2,524 $409,398
=========== ============ ============ ============
</TABLE>
As discussed in note 5 to the consolidated financial statements,
securities with a carrying value of $231.8 million were reclassified from
securities held to maturity to securities available for sale at December 29,
1995.
The weighted average stated interest rates on securities held to maturity
were 8.25% and 5.79% at December 31, 1995 and 1994, respectively.
The following represents a summary of the carrying values (amortized
cost), estimated fair values, and weighted average yield of securities held
to maturity with related maturities (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------
WEIGHTED
AMORTIZED ESTIMATED AVERAGE
COST FAIR VALUE YIELD
<S> <C> <C> <C>
Municipal securities:
Maturing within 1 year .................. $1,250 $1,250 8.25%
Maturing after 1 year but within 5 years 205 205 8.25
----------- ----------- ----------
Total .................................. $1,455 $1,455 8.25%
=========== =========== ==========
</TABLE>
F-19
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) MORTGAGE-BACKED SECURITIES
At December 31, 1995 and 1994, mortgage-backed securities to be held to
maturity consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FHLMC .......................... $ 533,208 $15,285 $-- $ 548,493
FNMA ........................... 988,700 27,424 -- 1,016,124
Other mortgage-backed
securities .................... 2,580 -- -- 2,580
------------ ------------ ------------ ------------
$1,524,488 $42,709 $-- $1,567,197
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FHLMC .............................. $1,659,912 $4,865 $17,744 $1,647,033
FNMA ............................... 1,078,323 1,234 19,093 1,060,464
GNMA ............................... 15,712 4 203 15,513
Collateralized Mortgage Obligations 396,820 13 26,894 369,939
Other mortgage-backed securities .. 3,045 -- -- 3,045
------------ ------------ ------------ ------------
$3,153,812 $6,116 $63,934 $3,095,994
============ ============ ============ ============
</TABLE>
As discussed in note 5 to the consolidated financial statements,
mortgage-backed securities with a carrying value of $1.5 billion were
reclassified from mortgage-backed securities held to maturity to securities
available for sale at December 29, 1995.
The weighted average interest rate on mortgage-backed securities to be
held to maturity were 7.46% and 6.30% at December 31, 1995 and 1994,
respectively.
At December 31, 1995 and 1994, mortgage-backed securities to be held to
maturity included securities totalling $1.5 billion and $1.4 billion,
respectively, which resulted from the securitization of certain qualifying
mortgage loans from First Nationwide's loan portfolio. At December 31, 1995
and 1994, these securities include $1.5 billion and $1.3 billion,
respectively, which have been securitized with FNMA and FHLMC with full
recourse to the Bank. At December 31, 1995 and 1994, mortgage-backed
securities to be held to maturity included $1.5 billion and $2.5 billion,
respectively, of variable-rate securities.
F-20
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) LOANS RECEIVABLE, NET
At December 31, 1995 and 1994, loans receivable, net, excluding Covered
Assets, included the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Real estate loans:
1-4 unit residential mortgage .................. $5,423,411 $ 5,612,150
5+ unit residential mortgage ................... 1,854,333 2,177,646
Commercial ..................................... 1,716,121 2,015,808
Construction ................................... -- 7,544
Land ........................................... 8,840 15,270
------------ ------------
9,002,705 9,828,418
Undisbursed loan funds ......................... -- (732)
------------ ------------
Total real estate loans ...................... 9,002,705 9,827,686
------------ ------------
Equity-line loans .............................. 110,830 408,964
Other consumer loans ........................... 60,106 82,996
Commercial loans ............................... 1,913 970
------------ ------------
Total consumer and other loans ............... 172,849 492,930
------------ ------------
Total loans receivable ....................... 9,175,554 10,320,616
Deferred fees and unearned premiums (discounts) 19,423 (255)
Allowance for loan losses ...................... (210,484) (202,780)
Purchase accounting discounts, net ............. (153,475) (150,695)
------------ ------------
Total loans receivable, net .................. $8,831,018 $ 9,966,886
============ ============
</TABLE>
The Bank's lending activities are principally conducted in California, New
York and Florida.
As a result of the FN Acquisition, the Bank assumed obligations for
certain loans sold with recourse. The outstanding balances of loans sold with
recourse at December 31, 1995 totalled $333.2 million. The Bank evaluates the
credit risk of loans sold with recourse and, if necessary, records a
liability (other liabilities) for estimated losses related to these potential
obligations. No loans were sold with recourse during the years ended December
31, 1995, 1994 and 1993.
F-21
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table indicates the amount of loans which have been placed
on nonaccrual status as of the dates indicated (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
Nonaccrual loans:
Real estate:
1-4 unit residential ..... $135,710 $133,439
5+ unit residential ...... 23,253 23,543
Commercial and other ..... 9,280 11,334
Land ...................... 136 6,850
Construction .............. -- 2,036
---------- ----------
Total real estate .... 168,379 177,202
Non-real estate ........... 3,159 4,002
---------- ----------
Total nonaccrual loans $171,538 $181,204
========== ==========
</TABLE>
The following table indicates the carrying value of loans classified as
troubled debt restructurings, net of purchase accounting adjustments, and
excluding Covered Assets, as of December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1995 1994
---------- ---------
<S> <C> <C>
1-4 unit residential real estate $ 8,479 $ 19,026
5+ unit residential real estate 146,971 203,742
Commercial and other real estate 79,000 110,123
---------- ---------
Total restructured loans ..... $234,450 $332,891
========== =========
</TABLE>
At December 31, 1995, the Bank's loan portfolio totalling $9.2 billion is
concentrated in California. The financial condition of the Bank is subject to
general economic conditions such as the volatility of interest rates and real
estate market conditions and, in particular, to conditions in the California
residential real estate market. Any downturn in the economy generally, and in
California in particular, could further reduce real estate values. An
increase in the general level of interest rates may adversely affect the
ability of certain borrowers to pay the interest on and principal of their
obligations. Accordingly, in the event interest rates rise or real estate
market values decline, particularly in California, the Bank may find it
difficult to maintain its asset quality and may require additional allowances
for loss above the amounts currently estimated by management.
For nonaccrual loans and loans classified as troubled debt restructurings,
the following table summarizes the interest income recognized ("Recognized")
and total interest income that would have been recognized had the borrowers
performed under the original terms of the loans ("Contractual") for the years
ended December 31, 1995 and 1994 (in thousands). There were no loans
classified as troubled debt restructurings in 1993.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------------- ---------------------------
RECOGNIZED CONTRACTUAL RECOGNIZED CONTRACTUAL
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Restructured loans $22,098 $33,093 $6,976 $ 8,572
Nonaccrual loans .. 6,136 15,329 544 3,806
------------ ------------- ------------ -------------
$28,234 $48,422 $7,520 $12,378
============ ============= ============ =============
</TABLE>
F-22
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1995 and 1994, respectively, the Bank and its wholly
owned subisdiary, FGB Realty Advisors, Inc., managed principally
non-performing loan and asset portfolios totalling 41.3 billion and $1.6
billion, respectively, for investors. Revenues related to such activities are
included in management fees in the accompanying statements of operations.
Activity in the allowance for loan losses for the years ended December 31,
1995, 1994 and 1993 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Balance -- January 1 ........................ $202,780 $ 2,250 $ 14,537
Purchases -- FN Acquisition ................. -- 201,927 --
Provision for loan losses ................... 37,000 6,226 1,402
Allowance for losses assigned to loans sold -- -- (12,918)
Charge-offs ................................. (32,344) (9,676) (1,860)
Recoveries .................................. 3,048 2,053 1,089
---------- ---------- ----------
Balance -- December 31 ...................... $210,484 $202,780 $ 2,250
========== ========== ==========
</TABLE>
(9) IMPAIRED LOANS
The Company's adoption of SFAS No. 114, as amended by SFAS No. 118,
effective January 1, 1995, had no material impact on the Company's
consolidated financial statements as the Company's existing policy of
measuring loan impairment was consistent with methods prescribed in these
standards.
At December 31, 1995, the carrying value of loans that are considered to
be impaired under SFAS No. 114 totalled $125.4 million (of which $29.6
million were on nonaccrual status). The average recorded investment in
impaired loans during the year ended December 31, 1995 was approximately
$125.5 million. For the year ended December 31, 1995, the Company recognized
interest income on those impaired loans of $12.9 million, which included $.2
million of interest income recognized using the cash basis method of income
recognition.
Generally, specific allowances for loan losses relative to impaired
multi-family and commercial real estate loans, which comprised the majority
of impaired loans at December 31, 1995, have not been established, because
most would be eligible to be sold to Granite under the Put Agreement (see
note 10). There have been no significant multi-family or commercial real
estate loans originated since October 1, 1994.
(10) PUT AGREEMENT
In connection with the FN Acquisition, the Bank assumed generally the same
rights under an agreement ("Put Agreement") Old FN had with Granite
Management and Disposition, Inc. ("Granite"), an indirect subsidiary of Ford
Motor Company, whereby Old FN had the option to sell ("put") to Granite, on a
quarterly basis, up to approximately $500 million of certain assets,
primarily non-performing commercial real estate loans and residential
mortgage loans with an original principal balance greater than $250,000. The
Put Agreement will expire upon the earlier of (i) November 30, 1996; or (ii)
the date on which the aggregate purchase price of assets which have been
"put" to Granite equals $500 million, including assets "put" to Granite by
Old FN through October 3, 1994. The purchase price represents the outstanding
principal balance, accrued interest and certain other expenses. The remaining
balance of the Put Agreement at December 31, 1995 was $112.4 million.
(11) RECEIVABLES FROM THE FSLIC/RF -- COVERED ASSETS
COMPONENTS AND COVERAGE PERIODS
Covered Assets represent guaranteed amounts to be received by First
Nationwide either from the disposition of the underlying assets or from the
FSLIC/RF. During the coverage period, which varies
F-23
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
based on the underlying asset, First Nationwide is not subject to any loss
from the disposition of such assets other than the 10% FSLIC/RF
Reimbursement.
During the coverage period, the FSLIC/RF guarantees to First Nationwide an
agreed-upon yield on Covered Assets ("Guaranteed Yield"). The Guaranteed
Yield is based on a spread that began at 2.25% over the Texas cost of funds
(the average cost of funds of all previous FSLIC-insured institutions whose
main offices are located in Texas as most recently reported by the Office of
Thrift Supervision ("TCOF")) declining to 1.50% over the TCOF over the term
of the Assistance Agreement. The TCOF was 5.63%, 4.46% and 4.07% at December
31, 1995, 1994, and 1993, respectively. The spread over the TCOF was 1.90%,
2.00% and 2.05% at December 31, 1995, 1994, and 1993, respectively.
Certain provisions of the Assistance Agreement were amended and/or
modified in January 1992. The Bank recorded a FSLIC/RF rebate reserve in 1992
based on the present value of the FSLIC/RF Reimbursement amount (net of
Shared Gains) to be paid. At December 31, 1994, this reserve was reflected as
a reduction of the related Covered Assets and is evaluated periodically and
adjusted for any change in the expected amounts. The FSLIC/RF Reimbursement
reserve was fully utilized in 1995 as a result of the FDIC Purchase.
In June 1995, the FDIC, as manager of the FSLIC/RF, as successor to the
FSLIC, exercised its rights under the Assistance Agreement to purchase
substantially all of the remaining Covered Assets as of June 1, 1995 at the
fair market value of such assets and further purchased additional assets from
the remaining Covered Asset portfolio in September 1995 as part of the FDIC
Purchase. Under the terms of the Capital Loss Coverage provisions of the
Assistance Agreement, losses sustained by First Nationwide from the FDIC
Purchase were reimbursed by the FSLIC/RF. At December 31, 1995, the Covered
Asset balance of $39.3 million represents amounts which remain unpaid by the
FDIC in connection with the FDIC Purchase. The FDIC has elected to treat this
amount as a Covered Asset, earning Guaranteed Yield, until such time as it is
paid to the Bank.
(12) INVESTMENT IN FHLB
The Bank's investment in FHLB stock is carried at cost. The FHLB provides
a central credit facility for member institutions. As a member of the FHLB
system, the Bank is required to own capital stock in the FHLB in an amount
equal to the greater of (i) 1% of the aggregate outstanding principal amount
of its residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each calendar year, (ii) .3% of total assets,
or (iii) 5% of its advances (borrowings) from the FHLB. The Bank was in
compliance with this requirement at December 31, 1995 and 1994.
F-24
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) OFFICE PREMISES AND EQUIPMENT, NET
Office premises and equipment, net at December 31, 1995 and 1994 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
DEPRECIABLE LIVES
AT DECEMBER 31,
1995 1994 1995
---------- --------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Land ...................................... $ 17,952 $14,857 --
Buildings and leasehold improvements ..... 46,652 38,240 25
Furniture and equipment ................... 37,697 25,348 10
Capitalized equipment leases .............. -- 819 --
Construction in progress .................. 2,471 2,882 --
---------- --------- -----------------
104,772 82,146
Accumulated depreciation and amortization (11,263) (5,623)
---------- ---------
Total office premises and equipment, net $ 93,509 $76,523
========== =========
</TABLE>
Depreciation and amortization expense of office premises and equipment for
the years ended December 31, 1995, 1994 and 1993 totalled $8.8 million, $2.5
million and $2 million, respectively.
Certain of the office premises and equipment included in the above table
are included in the Branch Sale Agreements, as defined and more fully
described in note 34.
First Nationwide rents certain office premises and equipment under
long-term, noncancelable operating leases expiring at various dates through
2015. Rental expense under such operating leases, included in occupancy and
equipment expense, for the years ended December 31, 1995, 1994 and 1993
totalled $22.6 million, $4.2 million and $1.1 million, respectively. Rental
income from subleasing agreements for the years ended December 31, 1995 and
1994 totalled $2.2 million and $.4 million, respectively. At December 31,
1995, the projected minimum rental commitments, net of sublease agreements,
under terms of the leases were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
- -------------------
<S> <C>
1996 ............... $12,852
1997 ............... 11,399
1998 ............... 10,488
1999 ............... 8,188
2000 ............... 6,896
2001 and thereafter 11,096
---------
Total ............ $60,919
=========
</TABLE>
During 1995, the Bank established reserves for certain of these rental
expenses as further discussed in note 21.
The above table includes projected minimum rental commitments, net of
sublease agreements, of $2.5 million, $2.2 million, $2.0 million, $1.4
million, $1.1 million, and $5.8 million for the years ended 1996 through
2000, and 2001 and thereafter, respectively, related to facilities included
in the Branch Sale Agreements, as defined and further described in note 34.
F-25
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) FORECLOSED REAL ESTATE, NET
Foreclosed real estate, net, at December 31, 1995 and 1994 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
1-4 unit residential real estate ... $33,694 $37,396
Multifamily real estate ............. 14,368 --
Commercial real estate .............. 506 --
Less allowance for losses ........... (33) (27)
--------- ---------
Total foreclosed real estate, net $48,535 $37,369
========= =========
</TABLE>
Activity in the allowance for losses on foreclosed real estate for the
years ended December 31, 1995, 1994 and 1993 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------- -------
<S> <C> <C> <C>
Balance -- January 1 . $ 27 $ 223 $ 358
Charge-offs ........... (53) (248) (135)
Recoveries ............ 59 52 --
------ ------- -------
Balance -- December 31 $ 33 $ 27 $ 223
------ ------- -------
</TABLE>
(15) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1995 and 1994 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Cash and cash equivalents and securities $ 4,387 $ 4,062
Mortgage-backed securities .............. 21,200 19,268
Loans receivable ........................ 75,017 64,376
---------- ---------
Total accrued interest receivable .... $100,604 $87,706
========== =========
</TABLE>
(16) MORTGAGE-SERVICING RIGHTS
The following is a summary of activity for mortgage servicing rights
purchased ("Purchased"), originated ("Originated"), and excess servicing fees
receivable ("Excess") for the years ended December 31, 1995, 1994 and 1993
(in thousands):
<TABLE>
<CAPTION>
PURCHASED ORIGINATED EXCESS TOTAL
----------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Balance at January 1, 1993 ............. $ 71,951 -- $ 2,718 $ 74,669
Additions ............................. 1,191 -- 537 1,728
Amortization .......................... (2,123) -- (136) (2,259)
Distribution of stock of FGMH to First
Gibraltar Holdings ................... (71,019) -- (3,119) (74,138)
----------- ------------ --------- ----------
Balance at December 31, 1993 ........... -- -- -- --
Additions from FN Acquisition ......... 90,000 -- -- 90,000
Additions -- other .................... 168 -- 276 444
Amortization .......................... (3,600) -- (4) (3,604)
----------- ------------ --------- ----------
Balance at December 31, 1994 ........... 86,568 -- 272 86,840
Additions from Maryland Acquisition .. 76,369 -- -- 76,369
Additions from Lomas 1995 Purchase ... 93,362 -- -- 93,362
Additions -- other .................... 774 $16,824 1,078 18,676
Amortization .......................... (33,324) (454) (114) (33,892)
----------- ------------ --------- ----------
Balance at December 31, 1995 ........... $223,749 $16,370 $ 1,236 $241,355
=========== ============ ========= ==========
</TABLE>
F-26
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1995, 1994 and 1993, the outstanding balances of
single-family residential mortgage loan participations, whole loans and
mortgage pass-through securities serviced for other investors by FNMC
totalled $27.1 billion, $7.5 billion and $0.3 billion, respectively. In
addition, the loan servicing portfolio included $3.0 billion of master
servicing at December 31, 1995.
SFAS No. 122 requires enterprises to measure the impairment of servicing
rights based on the difference between the carrying amount of the servicing
rights and their current fair value. At December 31, 1995, no allowance for
impairment of the mortgage servicing rights was necessary. The estimated fair
value of the mortgage servicing rights was $307 million and $91 million at
December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, servicing advances and other receivables
related to single-family residential mortgage loan servicing, net of
valuation allowances of $6 million and $9 million in 1995 and 1994,
respectively, (included in other assets) consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Servicing advances ................ $ 57,359 $16,485
Corporate advances due from banks 73,566 21,111
Other ............................. 35,042 1,729
---------- ---------
$165,967 $39,325
========== =========
</TABLE>
(17) DEPOSITS
A summary of deposits and weighted average contractual interest rates at
December 31, 1995 and 1994 follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
------------------------ ----------------------
AVERAGE CARRYING AVERAGE CARRYING
RATE VALUE RATE VALUE
--------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Passbook accounts .............. 2.17% $ 663,880 2.14% $ 685,049
Demand deposits:
Interest-bearing .............. .98 684,079 1.04 666,957
Noninterest-bearing ........... -- 696,918 -- 351,824
Money market deposit accounts . 3.14 1,443,465 3.11 1,926,851
Term accounts:
3.00% or less ................ 2.82 2,882 2.91 45,055
3.01- 4.00% .................. 3.68 112,564 3.57 1,050,648
4.01- 5.00 ................... 4.65 367,247 4.52 1,596,827
5.01- 6.00 ................... 5.49 3,053,770 5.46 1,113,486
6.01- 7.00 ................... 6.52 1,944,418 6.42 703,933
7.01- 8.00 ................... 7.34 95,780 7.56 371,446
8.01- 9.00 ................... 8.47 123,293 8.45 404,859
9.01- 10.00 .................. 9.29 149,434 9.31 173,694
10.01- 11.00 ................. 10.57 3,696 10.92 49,434
11.01- 12.00 ................. 11.52 788 11.12 8,206
12.01- 13.00 ................. 12.27 1,587 12.27 1,641
.............................. --------- ------------- --------- -----------
.............................. 4.67% 10,183,801 4.19% 9,149,910
Accrued interest payable ..... 50,755 25,848
Purchase accounting
adjustments ................... 7,072 20,898
.............................. ------------- -----------
Total deposits ............... $10,241,628 $9,196,656
.............................. ============= ===========
</TABLE>
F-27
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The aggregate amount of jumbo certificates of deposit (term deposits)
with a minimum denomination of $100,000 was approximately $690 million and
$523 million at December 31, 1995 and 1994, respectively. Brokered
certificates of deposit totalling $965 million and $824 million were included
in deposits at December 31, 1995 and 1994, respectively.
A summary of interest expense by deposit category for the years ended
December 31, 1995, 1994 and 1993 follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- --------
<S> <C> <C> <C>
Passbook accounts ................ $ 14,668 $ 3,843 $ 768
Interest bearing demand deposits 6,953 1,809 879
Money market deposit accounts ... 50,847 16,137 5,498
Term accounts .................... 374,891 79,168 48,265
---------- ---------- --------
$447,359 $100,957 $55,410
========== ========== ========
</TABLE>
At December 31, 1995, term accounts had scheduled maturities as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
1996 ............... $4,928,828
1997 ............... 1,071,908
1998 ............... 157,438
1999 ............... 180,424
2000 ............... 310,302
2001 and thereafter 46,559
------------
$6,695,459
============
</TABLE>
Certain of these deposits are the subject of the Branch Sale Agreements,
as defined and more fully described in note 34.
(18) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
A summary of information regarding securities sold under agreements to
repurchase as of December 31, 1995 and 1994 follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------
UNDERLYING COLLATERAL REPURCHASE LIABILITY
------------------------ ----------------------
RECORDED INTEREST
VALUE (1) MARKET VALUE AMOUNT RATE
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Maturing within 30 days ........ $501,647 $ 511,513 $487,528 5.82%
Maturing 30 days to 90 days ... 236,483 240,152 210,057 6.64
Maturing over 1 year ........... 253,363 254,502 250,000 7.63
---------- ------------ ---------- ----------
Total(ii) .................... 991,493 1,006,167 947,585
Purchase accounting adjustment 554 554 --
Accrued interest payable ...... -- -- 21,925
---------- ------------ ----------
$992,047 $1,006,721 $969,510
========== ============ ==========
</TABLE>
F-28
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------------------------------
UNDERLYING COLLATERAL REPURCHASE LIABILITY
-------------------------- -----------------------
RECORDED INTEREST
VALUE (1) MARKET VALUE AMOUNT RATE
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Maturing within 30 days ..... $ 321,965 $ 319,249 $ 306,659 6.07%
Maturing 30 days to 90 days . 1,231,871 1,226,579 1,168,738 6.22
Maturing 90 days to 1 year .. 438,362 433,454 404,286 7.70
Total (ii) .................... 1,992,198 1,979,282 1,879,683
Purchase accounting adjustment 3,078 3,078 53
Accrued interest payable ..... -- -- 3,754
------------ ------------ -----------
$1,995,276 $1,982,360 $1,883,490
============ ============ ===========
</TABLE>
- ------------
(i) Recorded value includes accrued interest at December 31, 1995 and 1994.
In addition, the recorded value at December 31, 1995 includes
adjustments for the unrealized gain or loss on securities available for
sale pursuant to SFAS No. 115.
(ii) Total mortgage-backed securities collateral at December 31, 1995 and
1994 includes $585 million and $876 million, respectively, in recorded
value of loans securitized with full recourse to the Bank. The market
value of such collateral was $600 million and $876 million at December
31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, these agreements had weighted average
interest rates of 6.48% and 6.51%, respectively. The underlying securities
were delivered to, and are being held by third party securities dealers.
These dealers may have loaned the securities to other parties in the normal
course of their operations, but all agreements require the dealers to resell
to First Nationwide the identical securities at the maturities of the
agreements. Securities sold under agreements to repurchase averaged $1.6
billion and $499 million during 1995 and 1994, respectively, and the maximum
amount outstanding at any month-end during these periods was $2.2 billion and
$1.9 billion, respectively.
(19) BORROWINGS
Borrowings at December 31, 1995 and 1994 are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
----------------------- -----------------------
CARRYING AVERAGE CARRYING AVERAGE
VALUE RATE VALUE RATE
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Fixed-rate borrowings from the FHLB .... $1,789,811 6.68% $2,242,323 7.61%
Variable-rate borrowings from the FHLB . 250,000 6.02 275,000 5.93
Senior Notes ............................ 200,000 12.25 200,000 12.25
Subordinated debentures due October 2006 92,100 10.00 92,100 10.00
Federal funds purchased ................. 55,000 6.00 -- --
Other borrowings ........................ 3,755 7.91 4,416 7.94
Total borrowings ...................... 2,390,666 7.19 2,813,839 7.85
Accrued interest payable ................ 11,555 -- 18,635 --
Purchase accounting adjustments ........ (9,359) -- (23,495) --
------------ --------- ------------ ---------
Total other borrowings ................ $2,392,862 7.19% $2,808,979 7.85%
============ ========= ============ =========
</TABLE>
F-29
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Maturities and weighted average stated interest rates of borrowings at
December 31, 1995, not including accrued interest payable or purchase
accounting adjustments, follow (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
MATURITIES DURING THE YEARS BALANCES MATURING RATES
ENDING DECEMBER 31 ------------------- ------------------------
- --------------------------- FHLB OTHER FHLB OTHER
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1996 ....................... $1,487,166 $ 55,236 6.12% 6.01%
1997 ....................... 240,000 213 8.61 8.10
1998 ....................... 310,000 200 7.34 8.20
1999 ....................... 250 171 7.75 8.19
2000 ....................... -- 121 -- 8.27
2001and thereafter ......... 2,395 294,914 7.71 11.51
------------ ---------- ------- -------
Total .................... $2,039,811 $350,855 6.60% 10.65%
============ ========== ======= =======
</TABLE>
Interest expense on borrowings for the years ended December 31, 1995, 1994
and 1993,are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
FHLB advances .................. $139,051 $71,662 $15,895
Interest rate swap agreements . (15,177) (8,797) --
Subordinated debentures ........ 9,210 2,303 --
Senior Notes ................... 24,500 6,150 --
Federal funds purchased ........ 2,268 438 --
Revolving warehouse line ...... -- -- 1,924
Other .......................... 1,403 332 694
Purchase accounting adjustments 21,244 7,937 --
---------- --------- ---------
Total ........................ $182,499 $80,025 $18,513
========== ========= =========
</TABLE>
The following is a summary of the carrying value of assets pledged as
collateral for FHLB advances at December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Real estate loans (primarily residential) $1,643,971
Mortgage-backed securities ................ 905,823
FHLB stock ................................ 109,943
------------
Total ................................... $2,659,737
============
</TABLE>
In connection with the FN Acquisition, the Company issued $200 million
principal amount of 12 1/4% Senior Notes, including $5.5 million principal
amount of Senior Notes to certain directors and officers of the Bank. The
notes will mature on May 15, 2001 with interest payable semiannually on May
15 and November 15. Deferred issuance costs associated with the Senior Notes'
issuance totalling $9.6 million were recorded in other assets in the 1994
consolidated statement of financial condition and are being amortized over
the term of the Senior Notes.
The notes are redeemable at the option of the Company, in whole or in
part, during the 12-month period beginning May 15, 1999, at a redemption
price of 106.125% plus accrued interest to the date of redemption, and
thereafter at 100% plus accrued interest. The notes are subordinated to all
existing and future liabilities, including deposits and other borrowings of
the Bank, and to the Preferred Stock. The terms and conditions of the
Indenture impose restrictions that affect, among other things, the ability of
FN Holdings to incur debt, pay dividends, make acquisitions, create liens,
sell assets and make certain investments. The Company was in compliance with
these covenants at December 31, 1995.
F-30
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(20) INTEREST RATE SWAP AGREEMENTS
Interest rate swap agreements outstanding at December 31, 1995 are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
NOTIONAL WEIGHTED AVERAGE ESTIMATED
PRINCIPAL RATE MATURITY IN VARIABLE RATE
MATURITY DATE AMOUNT PAY RECEIVE YEARS INDEX
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
April 1996 ..... $ 500,000 6.04% 8.19% .26 3 month LIBOR
September 1996 250,000 5.96 4.19 .71 1 month LIBOR
April 1998 ..... 400,000 6.00 8.38 2.26 3 month LIBOR
------------
Total ........ $1,150,000
============
</TABLE>
<TABLE>
<CAPTION>
NOTIONAL WEIGHTED AVERAGE ESTIMATED
PRINCIPAL RATE MATURITY IN VARIABLE RATE
MATURITY DATE AMOUNT PAY RECEIVE YEARS INDEX
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
April 1995 ..... $ 500,000 5.06% 7.97% .3 3 month LIBOR
April 1996 ..... 500,000 5.64 8.19 1.3 3 month LIBOR
September 1996 250,000 6.14 4.19 1.8 1 month LIBOR
April 1998 ..... 400,000 5.56 8.38 3.3 3 month LIBOR
------------
Total ........ $1,650,000
============
</TABLE>
The Bank uses interest rate swap agreements to hedge against interest rate
risk inherent in its FHLB advances. Under the agreements, the Bank receives
or makes payments based on the differential between fixed-rate and
variable-rate interest amounts on the notional amount of the agreement. The
notional amounts of these derivatives do not represent amounts exchanged by
the parties and thus, are not a measure of the Bank's exposure through its
use of derivatives. The Bank pays the variable-rate and receives the
fixed-rate under these agreements. The variable interest rates presented in
the table above are based on LIBOR. The current LIBOR rates have been assumed
implicitly, in the aforementioned weighted average receive rate, to remain
constant throughout the term of the respective swaps. Any changes in LIBOR
interest rates would affect the variable-rate information disclosed above.
The Bank is exposed to credit-related losses in the event of
nonperformance by the counterparties to these agreements but does not expect
any counterparties to fail their obligations. The Bank deals only with highly
rated counterparties.
F-31
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(21) ACCRUED TERMINATION AND FACILITIES COSTS
During the year ended December 31, 1995, the Bank recognized liabilities
for certain employee severance and termination costs and facilities costs as
a result of: (i) the relocation of the Bank's mortgage loan servicing
operations to Maryland, (ii) the closure of substantially all the Bank's
retail mortgage loan production offices, (iii) a Bank-wide cost reduction
project, and (iv) branch consolidations due to duplicate facilities resulting
from certain Branch Acquisitions. These accruals have been charged to
noninterest expense in the accompanying consolidated statement of operations
for the year ended December 31, 1995 as follows (in thousands):
<TABLE>
<CAPTION>
COMPENSATION &
EMPLOYEE OCCUPANCY &
BENEFITS EQUIPMENT TOTAL
-------------- ------------- --------
<S> <C> <C> <C>
Servicing relocation ........... $1,800 $3,913 $ 5,713
Closing loan production offices 787 1,294 2,081
Cost reduction project ......... 4,000 446 4,446
Branch consolidations .......... -- 532 532
-------------- ------------- --------
Total liability established . 6,587 6,185 12,772
Charges to liability account .. 4,374 2,239 6,613
-------------- ------------- --------
Balance, December 31, 1995 .. $2,213 $3,946 $ 6,159
============== ============= ========
</TABLE>
As a result of the relocation of the servicing operation to Frederick,
Maryland from Sacramento, California, virtually all California-based loan
servicing employees were terminated. Termination benefits totalling
approximately $1.8 million have been charged against the liability
established. In addition, the relocation resulted in the vacancy of
approximately 108,000 square feet of leased office space in Sacramento. A
$3.9 million liability was established in 1995 representing the estimated
present value of future occupancy expenses, offset by estimates of sub-lease
income over the remaining six-year term of the lease. At December 31, 1995
approximately $.9 million had been charged against this liability.
In connection with the Bank's closure of substantially all of its retail
mortgage loan production offices, certain employees were terminated.
Termination benefits totalling approximately $.8 million have been charged
against the liability established. In addition, such closure resulted in the
vacancy of 18 leased offices. The $1.3 million liability established in April
1995 represents the estimated present value of future occupancy expenses,
offset by estimates of sub-lease income over the applicable remaining lease
terms. At December 31, 1995, costs totalling approximately $.8 million had
been charged against the liability.
In connection with a project to identify opportunities for reducing
operating costs and enhancing the efficiency of its operations, management
has identified certain employees whose positions would be eliminated. These
positions span all areas and business units of the Bank. An initial liability
for termination benefits totalling $4 million was established, of which $1.8
million had been charged at December 31, 1995 relating to this plan. In
connection with the elimination of these positions, the Bank has identified
opportunities for office space consolidation and has established additional
liabilities totalling $.4 million for lease termination payments, none of
which had been charged at December 31, 1995.
The Bank has identified certain of its retail banking facilities that will
be closed and marketed for sale, with the related operations consolidated
into other retail banking facilities acquired in the Branch Acquisitions.
Accordingly, a liability of $.5 million was established during the year ended
December 31, 1995 to record such facilities at fair value, which amount had
been charged at December 31, 1995.
(22) MINORITY INTEREST--PREFERRED STOCK OF THE BANK
In connection with the FN Acquisition, the Bank issued 3,007,300 shares of
its Preferred Stock with a par value of $.01 per share, having a liquidation
preference of $300.7 million. This stock has a stated
F-32
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
liquidation value of $100 per share. Costs related to the Preferred Stock
issuance were deducted from additional paid-in capital. At or after September
1, 1999, the Preferred Stock is redeemable at the option of the Bank, in
whole or in part, at $105.75 per share prior to September 1, 2000, and at
prices which will decrease annually thereafter to the stated liquidation
value of $100 per share on or after September 1, 2004, plus declared but
unpaid dividends. Dividends are payable quarterly at an annual rate of 11.5%
per share when declared by the Bank's Board of Directors.
(23) STOCKHOLDERS' EQUITY
(a) Common Stock
In connection with the FN Acquisition and the offering of the Senior
Notes, First Gibraltar Holdings incorporated Parent Holdings and FN Holdings
to hold 100% of the common stock of First Nationwide Bank. First Gibraltar
Holdings contributed all of its shares of capital stock of the Bank to Parent
Holdings, which contributed such shares to FN Holdings in exchange for 1,000
shares of common stock of FN Holdings.
In 1994, FN Holdings amended its certificate of incorporation to create
800 shares of class A common stock having one vote per share, 200 shares of
class B common stock having .75 votes per share, and 230.3 shares of
nonvoting class C common stock. Parent Holdings exchanged its 1,000 shares of
common stock of FN Holdings for 800 shares of class A common stock.
Pursuant to the terms of an exchange agreement between FN Holdings, the
Bank's Chairman and Parent Holdings (the "Exchange Agreement"), and in
connection with the consummation of the FN Acquisition, FN Holdings issued
100% of its class C common stock to Parent Holdings for approximately $210.3
million, and the Bank's Chairman acquired 100% of the class B common stock of
FN Holdings, in exchange for his 6.25% of the class A common stock of First
Gibraltar Holdings.
As a result of the consummation of the transactions contemplated by the
Exchange Agreement, the Bank's Chairman owned 100% of the class B common
stock of FN Holdings, representing 20% of its voting common stock
(representing approximately 15% of the voting power of its common stock), and
Parent Holdings owns (i) 100% of the class A common stock of FN Holdings,
representing 80% of its voting common stock (representing approximately 85%
of the voting power of its common stock) and (ii) 100% of the class C common
stock of FN Holdings. The class C common stock is redeemable out of
distributions from the Bank for $230.3 million plus accrued interest to the
date of redemption at a rate equal to the interest rate on the secured term
credit facility. On December 29, 1995, the Bank's Chairman transferred his
shares of class B common stock to a limited partnership controlled by the
Bank's Chairman.
No dividend will be payable on the class A common stock or the class B
common stock of the Company as long as any shares of the class C common stock
remain outstanding. Dividends on the Company's class C common stock during
1995 totalled $29.2 million. In addition, 60.8 shares of the Company's class
C common stock were redeemed during 1995, resulting in a capital distribution
totalling $60.8 million. There were no dividends or distributions on common
stock in 1994. Dividends and distributions on common stock in 1993 totalled
$379.5 million and included certain assets of the Bank, including the stock
of FGMH.
(b) Preferred Stock
Floating rate noncumulative preferred stock of the Bank ("Old Preferred
Stock") was issued by the Bank in December 1989 to First Gibraltar Holdings.
The par value of the Old Preferred Stock was $.01 with 200,000 shares
originally issued and 500,000 shares authorized. The liquidation preference
and stated value was $1,000 per share. During 1990, 75,500 shares were
redeemed at liquidation value. During 1993, the remaining 124,500 shares were
redeemed at liquidation value.
F-33
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(c) Payment of Dividends
The payment of dividends by the Company may be limited by the indenture
agreement for the Senior Notes and is also restricted pursuant to provisions
mandated by the Company's charter. The Federal thrift laws and regulations of
the OTS limit the Bank's ability to pay dividends on its preferred or common
stock. The Bank generally may not pay dividends if, after the payment of the
dividends, it would be deemed "undercapitalized" under the prompt corrective
action standards of the Federal Deposit Insurance Corporation Improvement Act
of 1991. In addition, depending upon the extent to which the Bank meets its
fully phased-in regulatory capital requirements, other limitations will apply
to First Nationwide's payment of dividends. The payment of dividends by the
Bank will also be subject to the Bank's dividend policy, which reflects such
legal and regulatory restrictions.
(24) REGULATORY CAPITAL
As a savings institution which is regulated by the OTS, the Bank is
required to comply with capital requirements of the OTS. These regulations
require savings institutions to maintain minimum regulatory tangible capital
equal to 1.5% of adjusted total assets and minimum core capital equal to 3.0%
of adjusted total assets. Additionally, savings institutions are required to
meet a risk-based total capital requirement of 8.0%. At December 31, 1995,
the Bank's regulatory capital levels exceeded the minimum regulatory capital
requirements.
(25) FINANCIAL ASSISTANCE PROVIDED BY FSLIC/RF
Financial assistance provided pursuant to the Assistance Agreement for the
years ended December 31, 1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
ACTUAL FSLIC/RF GUARANTEED
YIELD ASSISTANCE YIELD
--------- ------------ ------------
<S> <C> <C> <C>
1995
Yield maintenance on Covered Assets:
Loans and accounts receivable ................ $ 7,572 $ (213) $ 7,359
Investments in and advances to subsidiaries . (63) 283 220
Real estate owned ............................ (1,890) 5,016 3,126
--------- ------------ ------------
$ 5,619 5,086 $10,705
========= ============ ============
FSLIC/RF Reimbursement ........................ --
------------
Total effect of FSLIC/RF assistance on the
consolidated statement of operations ........ $ 5,086
============
FDIC Purchase proceeds, write-downs, losses on
Covered Assets and other claims .............. $236,378
============
</TABLE>
F-34
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
ACTUAL FSLIC/RF GUARANTEED
YIELD ASSISTANCE YIELD
--------- ------------ ------------
<S> <C> <C> <C>
1994
Yield maintenance on Covered Assets:
Loans and accounts receivable .............. $21,573 $ (5,543) $16,030
Investments in and advances to subsidiaries (473) 1,178 705
Real estate owned .......................... (1,561) 14,817 13,256
--------- ------------ ------------
$19,539 10,452 $29,991
========= ============ ============
FSLIC/RF Reimbursement ...................... (1,060)
------------
Total effect of FSLIC/RF assistance on the
consolidated statement of operations ...... $ 9,392
============
Write-downs and losses on Covered Assets and
other claims ............................... $71,220
============
</TABLE>
<TABLE>
<CAPTION>
ACTUAL FSLIC/RF GUARANTEED
YIELD ASSISTANCE YIELD
--------- ------------ ------------
<S> <C> <C> <C>
1993
Yield maintenance on Covered Assets:
Loans and accounts receivable .............. $27,458 $(4,884) $22,574
Investments in and advances to subsidiaries (4,488) 6,029 1,541
Real estate owned .......................... 4,953 19,897 24,850
Other ...................................... 35 128 163
--------- ------------ ------------
$27,958 21,170 $49,128
========= ============ ============
FSLIC/RF Reimbursement ...................... (5,694)
------------
Total effect of FSLIC/RF assistance on the
consolidated statement of operations ...... $15,476
============
Write-downs and losses on Covered Assets and
other claims ............................... $28,076
============
</TABLE>
(26) OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income and expense amounts are summarized as follows for
the years ended December 31, 1995, 1994 and 1993 (in thousands):
F-35
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Other noninterest income:
Dividends on FHLB stock ............. $ 6,546 $ 3,186 $ 1,438
Disbursement float .................. 2,622 943 149
Other ............................... 8,759 3,423 4,638
--------- --------- --------
$17,927 $ 7,552 $ 6,225
========= ========= ========
Other noninterest expense:
Professional fees ................... $11,802 $ 2,622 $ 5,906
Telephone ........................... 7,652 2,134 737
Insurance and surety bonds .......... 4,005 2,321 2,370
Postage ............................. 6,856 1,535 801
Printing, copying and office
supplies ............................ 6,096 2,057 1,103
Employee travel ..................... 5,244 1,249 449
Other ............................... 30,876 9,375 14,438
--------- --------- --------
$72,531 $21,293 $25,804
========= ========= ========
</TABLE>
(27) INCOME TAXES
Total income tax expense for the years ended December 31, 1995, 1994 and
1993 was allocated as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
----------- -------- --------
<S> <C> <C> <C>
Income before income taxes, extraordinary item and
minority interest ................................ $(57,185) $2,558 $2,500
Extraordinary item ................................ 221 119 --
----------- -------- --------
Net unrealized holding gain on securities
available
for sale ......................................... 7,055 -- --
----------- -------- --------
$(49,909) $2,677 $2,500
=========== ======== ========
</TABLE>
Income tax expense (benefit) for the years ended December 31, 1995, 1994
and 1993, consists of (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
----------- -------- --------
<S> <C> <C> <C>
Federal
Current ....... $ 285 $ -- $2,500
Deferred ...... (69,000) -- --
----------- -------- --------
(68,715) -- 2,500
----------- -------- --------
State and local
Current ....... 11,530 -- --
Deferred ...... -- 2,558 --
----------- -------- --------
11,530 2,558 --
----------- -------- --------
$(57,185) $2,558 $2,500
=========== ======== ========
</TABLE>
F-36
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The consolidated income tax expense (benefit) for the years ended
December 31, 1995, 1994 and 1993 differs from the amounts computed by
applying the statutory U.S. Federal corporate tax rate of 35% for 1995, 1994
and 1993, to income before income taxes and extraordinary item (in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
----------- --------- ----------
<S> <C> <C> <C>
Computed "expected" income tax expense ............. $ 42,858 $11,175 $ 51,316
Increase (decrease) in taxes resulting from:
State income taxes, net of Federal income tax
benefit ........................................ 7,495 1,740 --
Tax exempt income ................................ (2,636) (3,493) (5,679)
Amortization of excess cost over fair value of net
assets acquired ................................ -- -- 164
Earnings from nonconsolidated subsidiaries ....... -- -- (11,825)
Loss on sales of real estate owned, net of income
earned ......................................... -- -- (2,193)
Gain on sales of assets and deposits due to
goodwill ....................................... -- -- 19,152
Reduction of net operating losses related to
subsidiary ..................................... -- -- 12,214
Adjustment to prior year's tax expense ........... (1,675) -- --
Adjustment to deferred tax asset ................. 7,644 -- --
Unrealized holding gain on securities available
for sale recognized for tax purposes ........... 15,937 -- --
Other ............................................ (1,747) 306 390
Change in the beginning-of-the-year balance of the
valuation allowance for deferred tax assets
allocated to income tax expense ................ (125,061) (7,170) (61,039)
----------- --------- ----------
$ (57,185) $ 2,558 $ 2,500
=========== ========= ==========
</TABLE>
The significant components of deferred income tax expense (benefit)
attributable to income before income taxes and extraordinary item for the
years ended December 31, 1995, 1994 and 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
----------- --------- ----------
<S> <C> <C> <C>
Deferred tax expense (exclusive of the effects of
other components listed below) .................. $ 56,061 $ 9,728 $ 61,039
Decrease in beginning-of-the-year balance of the
valuation allowance for deferred tax assets .... (125,061) (7,170) (61,039)
----------- --------- ----------
$ (69,000) $ 2,558 $ --
=========== ========= ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1995 and 1994 are presented below (in thousands):
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ............... $920,300 $938,153
Foreclosed real estate ......................... -- 8,209
Loans receivable ............................... 6,868 62,833
Securities ..................................... -- 3,850
Miscellaneous reserves ......................... 11,842 5,538
F-37
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1995 1994
----------- -----------
Accrued liabilities .............................. 12,675 1,354
Deferred interest .............................. 4,552 --
State taxes .................................... 4,243 1,101
Other intangible assets ........................ 47,169 27,498
Alternative minimum tax credit and investment
tax credit carryforwards ...................... 2,932 3,290
Other .......................................... 8,174 4,116
----------- -----------
Total gross deferred tax assets .......... 1,018,755 1,055,942
Less valuation allowance ................. (810,459) (936,242)
----------- -----------
Net deferred tax assets .................. 208,296 119,700
----------- -----------
Deferred tax liabilities:
Change in accounting method .................... 35,043 46,725
Other intangible assets ........................ 41,651 --
Purchase accounting adjustments ................ 56,319 64,684
FHLB stock ..................................... 2,610 3,297
Unrealized gains on securities available for
sale .......................................... 2,503 --
Other .......................................... 3,673 4,994
----------- -----------
Net deferred tax liabilities ............. 141,799 119,700
----------- -----------
Net deferred tax assets and liabilities .. $ 66,497 $ --
=========== ===========
</TABLE>
The net change in the total valuation allowance for the year ended
December 31, 1995 was a decrease of $125.8 million, of which $125.1 million
is attributable to income before income taxes, extraordinary item and
minority interest and $.7 million is attributable to the extraordinary item.
The decrease of $125.1 million attributable to income before income taxes,
extraordinary item and minority interest consists of $69 million relating to
the favorable reassessment, in the fourth quarter of 1995, of future earnings
expectations and $56.1 million relating to the current year. The valuation
allowance for deferred tax assets at January 1, 1994 was approximately $943.8
million. The net change in the total valuation allowance for the year ended
December 31, 1994 was a decrease of $7.6 million.
As of December 31, 1994, FN Holdings recorded a valuation allowance for
100% of the Company's net deferred tax asset because at that time it was not
more likely than not that such deferred tax asset would be realized. Based on
a favorable earnings trend since the consummation of the FN Acquisition and
future earnings expectations, management changed its judgement about the
realizability of the Company's net deferred tax assets and recognized a
deferred tax benefit of $69 million in the fourth quarter of 1995. Management
believes that the realization of such asset is more likely than not, based
upon the expectation that FN Holdings will generate the necessary amount of
taxable income in future periods.
At December 31, 1995, if FN Holdings had filed a consolidated Federal
income tax return on behalf of itself (as common parent) with its
subsidiaries, it would have had regular and alternative minimum tax net
operating losses for Federal income tax purposes of approximately $2.6
billion and $992 million, respectively, which expire in 2002 through 2007.
(28) EMPLOYEE BENEFIT PLANS
Postretirement Benefits Plan
In connection with the FN Acquisition, the Bank assumed unfunded plans to
provide postretirement medical benefits to certain eligible employees and
their dependents through age 64. In general, early retirement is age 55 with
10 years of service. Retirees participating in the plans pay Consolidated
Omnibus Budget Reduction Act premiums for the period of time they
participate.
F-38
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated cost for postretirement health care benefits has been
accrued on an actuarial net present value basis, in accordance with the
requirements of Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
The following table sets forth the plans' combined liabilities included in
the Bank's consolidated statements of financial condition at December 31,
1995 and 1994 (in thousands):
Accumulated postretirement benefit obligation:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Retirees ................................... $ -- $ --
Eligible active plan participants .......... 1,177 713
Ineligible active plan participants ....... 1,719 1,164
-------- -------
Accrued postretirement benefit obligation
(other liabilities) ...................... $2,896 $1,877
======== =======
</TABLE>
The projected benefit obligation at December 31, 1995 and 1994 was
determined using a discount rate of 8.00% and 8.75%, respectively. At
December 31, 1995, an increase of 1% in the health care cost trend rate would
cause the accumulated postretirement benefit obligation to increase by $.1
million, and the service and interest costs to increase by less than $.1
million.
Net periodic postretirement benefits cost for the year ended December 31,
1995 and 1994 included the following components (in thousands):
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Service cost--benefits attributable
to service during the current period .............. $340 $ 78
Interest cost on accumulated postretirement benefit
obligation ........................................ 163 37
------ ------
Periodic postretirement benefit cost ............. $503 $115
====== ======
</TABLE>
The initial health care cost trend rate for medical benefits in 1995 was
9.50%, and the average trend rate was 7.32% and the ultimate trend rate was
5.50% which will be reached in seven years. In 1994, the initial health care
cost trend rate for medical and dental benefits were 10% and 8%,
respectively, and the average trend rate used was 7.5%, with an ultimate
trend rate of 6%, to be achieved in ten years.
Investment Plan
In connection with the FN Acquisition, the Bank assumed Old FN's defined
contribution plan. Effective December 31, 1994, the Bank resolved to merge
these plans. The merger was completed in February 1995 upon completion of the
transfer of all funds to the surviving plan. Both plans are qualified plans
under Section 401(a) of the Internal Revenue Code. The plan is available to
substantially all employees with at least one year of employment. Employee
contributions are voluntary. The plan provides for deferral of up to 12% of
qualifying compensation of plan participants. The Bank's matching
contribution was a maximum of 100% of up to the first 3% of employee
deferrals. The annual discretionary employer profit sharing contribution is a
maximum of 3% of eligible compensation. It can be declared at any level in
the range from 0% to 3%. Employees vest immediately in their own deferrals
and any employer profit sharing contributions and vest in employer matching
contributions based on completed years of service. The Bank's contributions
to such plan totalled $2.8 million, $1.5 million, and $.65 million for the
years ended December 31, 1995, 1994 and 1993, respectively.
(29) INCENTIVE PLAN
Effective October 1, 1995, FN Holdings entered into a management incentive
plan ("Plan") with certain executive officers of the Bank ("Participants").
Awards under the Plan will be made in the form
F-39
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of performance units. Each performance unit entitles Plan Participants to
receive cash and/or stock options ("Bonuses") based upon the Participants'
vested interest in a bonus pool. Generally, the Plan provides for the payment
of Bonuses, on a quarterly basis, to the Participants upon the occurrence of
certain events. Bonuses vest at 20% per year beginning October 1, 1995 and
are subject to a cap of $50 million.
In accordance with generally accepted accounting principles, Bonuses are
recorded by a charge to compensation and employee benefits and an increase to
other liabilities. During 1995, a liability of $2 million was recorded
relative to the Plan.
(30) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Bank has various commitments and
contingent liabilities that are not reflected in the accompanying
consolidated financial statements. Loan commitments have off-balance-sheet
credit risk because only origination fees and accruals for possible losses
are recognized in the consolidated statement of financial condition until the
commitments are fulfilled. Credit risk represents the accounting loss that
would be recognized at the reporting date if counterparties failed to perform
as contracted. The credit risk amounts are equal to the contractual amounts,
assuming the amounts are fully advanced and that, in accordance with
Statement of Financial Accounting Standards No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk," collateral or
other security is of no value. The Bank does not anticipate any material loss
as a result of these commitments. The Bank applies the same credit standards
used in the lending process to extending these commitments, and periodically
reassesses the customers' credit worthiness through ongoing credit reviews.
The following is a summary of outstanding firm commitments to originate
and sell loans at December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Commitments to originate loans:
Fixed-rate ...................... $325,199 $29,583
Variable-rate ................... 101,355 81,230
Forward commitments to sell loans 572,363 $33,255
========== =========
</TABLE>
On September 28, 1994, First Nationwide entered into an agreement with
FNMA pursuant to which FNMA provided credit enhancements for certain
bond-financed real estate projects originated by Old FN. The agreement
requires that First Nationwide pledge to FNMA collateral in the form of
certain eligible securities which are held by a third party trustee. The
collateral requirement varies based on the balance of the bonds outstanding,
losses incurred (if any), as well as other factors. At December 31, 1995,
First Nationwide had pledged as collateral certain securities available for
sale and short-term investment securities with a carrying value of $98.6
million.
At December 31, 1995, mortgage-backed securities available for sale with a
carrying value of $39.0 million were pledged to FNMA associated with sales of
certain securitized multi-family loans.
At December 31, 1994, loans receivable included approximately $2.0 billion
of loans that had the potential to experience negative amortization.
Proposed budget reconciliation legislation that contains provisions to
recapitalize the SAIF has been passed by Congress. The legislation includes
provisions for a special assessment, as determined by the FDIC, on
SAIF-assessable deposits of insured depository institutions in an amount
adequate to cause the SAIF to achieve a specified designated reserve ratio.
Under the proposed legislation, the assessment would have been due January 1,
1996. The FDIC has publicly estimated that the amount of the special
assessment needed to recapitalize the SAIF ranges between 85 to 90 basis
points.
F-40
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The legislation provides that the assessment would be applied to SAIF
deposits held as of March 31, 1995. The SAIF-assessable deposits of the Bank
as of this date, adjusted for the deposit acquisitions and sales discussed in
notes 2 and 34, totalled approximately $8.9 billion. If the assessment is
made at a rate within the estimated range of 85 to 90 basis points, after
giving effect to the deposit acquisitions and sales discussed in notes 2 and
34, the effect on the Bank would be a pre-tax charge in the range of $75 to
$80 million ($68 to $72 million on an after-tax basis) (unaudited). It is
expected that in the event that the SAIF is capitalized pursuant to this
legislation, the assessment rates applicable to SAIF-assessable deposits will
be reduced substantially from the Bank's current rate of 23 cents. The
proposed legislation includes additional provisions that, among other things,
would require BIF member institutions to share pro rata in the obligations of
SAIF members for certain obligations issued by the Financing Corporation, a
corporation established by the federal government in 1987 to finance the
recapitalization of FSLIC. The President has vetoed this budget
reconciliation bill. Such veto, however, was based on issues unrelated to the
provisions dealing with capitalization of the SAIF. Congress and the
President are in negotiations that will affect the outcome of the
legislation. The Bank is unable to predict whether such legislation will be
enacted.
First Nationwide is involved in various claims and lawsuits arising from
the December 28, 1988 acquisition of five savings associations located in
Texas. Under the terms of the Assistance Agreement, FSLIC/RF will indemnify
First Nationwide for any amounts incurred in connection with the
satisfaction, settlement or compromise of such previous claims and lawsuits,
including costs and expenses.
First Nationwide is involved in various claims and lawsuits arising from
the December 28, 1988 acquisition of five savings associations located in
Texas. Under the terms of the Assistance Agreement, FSLIC/RF will indemnify
First Nationwide for any amounts incurred in connection with the
satisfaction, settlement or compromise of such previous claims and lawsuits,
including costs and expenses.
With respect to the FN Acquisition, First Nationwide and Old FN disagree
on two components of the purchase price paid for the FN Acquired Business,
which total approximately $28 million. This $28 million is carried in other
assets in the Bank's consolidated statement of financial condition. The more
significant of the two issues in dispute arises from Old FN's change in net
book value from January 1, 1994, to the close of business on September 30,
1994. In arriving at the cash purchase price, Old FN added back to the book
value of the purchased assets an amount of approximately $24 million which
had been amortized from intangible assets and goodwill for the period from
January 1, 1994 through September 30, 1994, thereby increasing the estimated
cash purchase price by $24 million. First Nationwide believes that the
exclusion of the amortization of intangible assets and goodwill from the
closing net book value is contrary to the express provisions of the Asset
Purchase Agreement. As a result, First Nationwide does not believe that the
addition by Old FN of $24 million to the cash purchase price was proper under
the terms of the Asset Purchase Agreement. First Nationwide and Old FN
commenced the arbitration in December 1995. Although management of First
Nationwide believes that it will prevail on this issue, in the event that
First Nationwide does not so prevail, the result would not be material to the
consolidated financial statements of First Nationwide.
The other remaining issue in dispute relates to an outstanding receivable
account, which the Bank maintains was overstated by approximately $4 million
by Old FN at September 30, 1994. Resolution of this issue remains
outstanding. Although management of the Bank believes that it will prevail on
this issue, in the event that it does not do so, the result would not be
material to the consolidated financial statements of First Nationwide.
In addition, First Nationwide is involved in various claims and lawsuits
arising in the ordinary course of business. Management is of the opinion that
the effect, if any, of these claims and lawsuits is not material to the
Bank's consolidated financial statements.
F-41
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(31) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1995 and 1994 (in thousands).
Statement of Financial Accounting Standards No. 107, "Disclosures of
Financial Instruments," defines the fair value of a financial instrument as
the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation
sale.
<TABLE>
<CAPTION>
1995 1994
--------------------------- --------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents ...................... $ 312,571 $ 312,571 $ 184,982 $ 184,982
Securities available for sale .................. 1,826,075 1,826,075 45,000 45,000
Securities held to maturity .................... 1,455 1,455 411,859 409,398
Mortgage-backed securities held to maturity ... 1,524,488 1,567,197 3,153,812 3,095,994
Loans held for sale ............................ 1,203,412 1,209,302 26,354 26,354
Loans receivable, net .......................... 8,831,018 8,971,983 9,966,886 9,832,003
Covered assets ................................. 39,349 39,349 311,603 311,603
Investment in FHLB ............................. 109,943 109,943 128,557 128,557
Accrued interest receivable .................... 100,604 100,604 87,706 87,706
Financial Liabilities:
Deposits ....................................... 10,241,628 10,283,600 9,196,656 9,140,000
Securities sold under agreements to repurchase 969,510 978,700 1,883,490 1,883,490
Borrowings:
Gross ......................................... 2,409,166 2,464,431 2,853,369 2,828,250
Interest rate swap agreements (1) ............. (16,304) (32,000) (44,390) (27,000)
------------- ------------ ------------ ------------
Total borrowings ............................ $ 2,392,862 $ 2,432,431 $2,808,979 $2,801,250
============= ============ ============ ============
Off-balance-sheet net unrealized gains (losses):
Commitments to originate loans ................. $ 1,691 $ --
Forward commitments to sell loans .............. (2,757) 56
</TABLE>
[FN]
- ------------
(1) Designated as a hedge against FHLB advances.
The carrying amounts in the table are included in the accompanying
consolidated statement of financial position under the indicated captions,
except for off-balance-sheet net unrealized gains (losses).
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Company's financial
instruments. Much of the information used to determine fair value is highly
subjective. When applicable, readily available market information has been
utilized. However, for a significant portion of the Company's financial
instruments, active markets do not exist. Therefore, considerable judgements
were required in estimating fair value for certain items. The subjective
factors include, among other things, the estimated timing and amount of cash
flows, risk characteristics, and interest rates, all of which are subject to
changes.
Cash and cash equivalents: Cash and cash equivalents are valued at their
carrying amounts included in the consolidated statement of financial
condition, which are reasonable estimates of fair value due to the relatively
short period to maturity of the instruments.
F-42
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Securities and mortgage-backed securities: Securities and mortgage-backed
securities are valued at quoted market prices where available. If quoted
market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans held for sale: Loans held for sale are valued based on quoted market
prices for mortgage- backed securities backed by similar loans.
Loans receivable, net: Fair values are estimated for loans in groups with
similar financial and risk characteristics. Loans are segregated by type
including residential, multi-family and commercial. Each loan type is further
segmented into fixed and variable interest rate terms and by performing and
non-performing categories in order to estimate fair values.
For performing residential mortgage loans, fair value is estimated by
discounting contractual cash flows adjusted for prepayment estimates using
discount rates based on secondary market sources. The fair value of
performing commercial and multi-family loans is calculated by discounting
scheduled principal and interest cash flows through the estimated maturity
using estimated market discount rates that reflect the credit and interest
rate risk inherent in the respective loan type.
Fair value for non-performing loans is based on discounting estimated cash
flows using a rate commensurate with the risk associated with the estimated
cash flows, or underlying collateral values, where appropriate.
Covered Assets: Since the carrying value of Covered Assets is fully
guaranteed by the FSLIC Resolution Fund, fair value of these financial
instruments approximates the carrying value.
Investment in FHLB: Since no secondary market exists for FHLB stock and
the stock is bought and sold at par by FHLB, fair value of these financial
instruments approximates the carrying value.
Accrued interest: The carrying amounts of accrued interest approximate
their fair values.
Deposits: The fair values of demand deposits, passbook accounts, money
market accounts, and other deposits immediately withdrawable, by definition,
approximate carrying values for the respective financial instruments. For
fixed maturity deposits, the fair value was estimated by discounting expected
cash flows by the current offering rates of deposits with similar terms and
maturities.
Securities sold under agreements to repurchase: The fair value of
securities sold under agreements to repurchase is estimated using a
discounted cash flow analysis based on interest rates currently offered on
such repurchase agreements with similar maturities.
Borrowings: The fair value of borrowings, other than FHLB advances and the
Senior Notes, are estimated using discounted cash flow analyses based on
current incremental rates for similar borrowing arrangements. The fair values
of FHLB advances are estimated using a discounted cash flow analysis based on
interest rates currently offered on advances with similar maturities. Fair
values of the Bank's interest rate swap agreements, which effectively hedge
certain of the Bank's FHLB advances, are based on the net present value of
the estimated interest due to the Bank as compared to the estimated interest
due to the counterparties of the agreements.
Off-balance sheet financial instruments: Fair values of the Bank's
commitments to originate loans is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements and the present creditworthiness of the counterparties. For
fixed-rate commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. Fair value of
forward commitments to sell loans are determined using current estimated
replacement costs.
F-43
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(32) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial data for the
years ended December 31, 1995 and 1994 (in thousands) (unaudited):
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995 TOTAL
- ------------------------------------ -------------- --------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Total interest income ............... $ 277,679 $ 270,583 $ 268,127 $ 259,456 $ 1,075,845
Total interest expense .............. (185,619) (184,751) (185,237) (179,208) (734,815)
-------------- --------------- ----------- ----------- -------------
Net interest income ................ 92,060 85,832 82,890 80,248 341,030
Provision for loan losses ........... (19,000) (6,000) (5,799) (6,201) (37,000)
-------------- --------------- ----------- ----------- -------------
Net interest income after provision
for loan losses ................... 73,060 79,832 77,091 74,047 304,030
Total noninterest income ............ 45,717 35,636 38,595 31,025 150,973
Total noninterest expense ........... (82,725) (76,973) (92,520) (80,335) (332,553)
-------------- --------------- ----------- ----------- -------------
Income before income taxes,
extraordinary item and minority
interest ........................... 36,052 38,495 23,166 24,737 122,450
Income taxes (see Note 27) .......... 64,614 (4,005) (2,743) (681) 57,185
-------------- --------------- ----------- ----------- -------------
Income berfore extraordinary item
and minority interest ............. 100,666 34,490 20,423 24,056 179,635
Extraordinary item .................. -- -- -- 1,967 1,967
-------------- --------------- ----------- ----------- -------------
Income before minority interest ... 100,666 34,490 20,423 26,023 181,602
Minority interest ................... (8,646) (8,646) (8,646) (8,646) (34,584)
-------------- --------------- ----------- ----------- -------------
Net income ......................... $ 92,020 $ 25,844 $ 11,777 $ 17,377 $ 147,018
============== =============== =========== =========== =============
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1994 1994 1994 1994 TOTAL
- ------------------------------------ -------------- --------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total interest income ............... $ 252,220 $12,856 $ 13,307 $ 14,756 $ 293,139
Total interest expense .............. (169,434) (9,385) (10,325) (10,701) (199,845)
-------------- --------------- ---------- ----------- -----------
Net interest income ................ 82,786 3,471 2,982 4,055 93,294
Provision for loan losses ........... (6,226) -- -- -- (6,226)
-------------- --------------- ---------- ----------- -----------
Net interest income after provision
for loan losses ................... 76,560 3,471 2,982 4,055 87,068
Total noninterest income ............ 28,651 4,174 4,634 3,699 41,158
Total noninterest expense ........... (74,401) (7,059) (7,279) (7,559) (96,298)
-------------- --------------- ---------- ----------- -----------
Income before income taxes and
extraordinary item ................ 30,810 586 337 195 31,928
Income taxes ........................ (2,558) -- -- -- (2,558)
-------------- --------------- ---------- ----------- -----------
Income before extraordinary item .. 28,252 586 337 195 29,370
Extraordinary item .................. (119) -- 1,495 -- 1,376
-------------- --------------- ---------- ----------- -----------
Net income ......................... $ 28,133 $ 586 $ 1,832 $ 195 $ 30,746
============== =============== ========== =========== ===========
</TABLE>
F-44
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(33) CONDENSED PARENT COMPANY FINANCIAL INFORMATION
The following represents condensed statements of financial condition of
the Company (parent company only) at December 31, 1995 and 1994 (in
thousands):
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents .................. $ 6 $ 3,801
Investment in Bank ......................... 659,155 539,867
Receivable from Bank ....................... -- 3,156
Office premises and equipment, net ........ -- 414
Other assets and deferred charges .......... 8,794 10,191
---------- ----------
Total assets .............................. $667,955 $557,429
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior Notes ............................... $200,000 $200,000
Accrued interest payable ................... 3,131 3,131
Payables to affiliates ..................... 304 1,301
Other liabilities .......................... 2,104 125
---------- ----------
Total liabilities ......................... 205,539 204,557
---------- ----------
Total stockholders' equity ................ 462,416 352,872
---------- ----------
Total liabilities and stockholders' equity $667,995 $557,429
========== ==========
</TABLE>
The following represents parent company only condensed statements of
operations for the years ended December 31, 1995, 1994, and 1993 (in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Interest income .......................................... $ 341 $ 155 $ --
Dividends received from the Bank ......................... 111,900 -- 136,210
---------- --------- ---------
112,241 155 136,210
Interest expense ......................................... 25,539 6,381 --
Non-interest expense ..................................... 5,819 987 --
---------- --------- ---------
31,358 7,368 --
Income (loss) before equity in undistributed net income
of the Bank ............................................. 80,883 (7,213) 136,210
Equity in undistributed net income of the Bank .......... 99,360 37,326 7,908
---------- --------- ---------
Income before taxes and minority interest ................ 180,243 30,113 144,118
Income tax expense (benefit) ............................. (1,359) (633) --
---------- --------- ---------
Income before minority interest .......................... 181,602 30,746 144,118
Minority interest in earnings of the Bank ................ 34,584 -- --
---------- --------- ---------
Net income .............................................. $147,018 $30,746 $144,118
========== ========= =========
</TABLE>
F-45
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following represents parent company only statements of cash flows for
the years ended December 31, 1995, 1994, and 1993 (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ...................................... $ 147,018 $ 30,746 $144,118
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of deferred issuance costs ....... 764 232 --
Decrease (increase) in receivable from the Bank 3,156 (3,156) --
Decrease (increase) in other assets and
deferred charges .............................. 633 (863) --
Increase (decrease) in payable to affiliates .. (997) 1,301 --
Increase in accrued interest payable ........... -- 3,131
Increase in other liabilities .................. 1,979 125
Equity in undistributed net income of the Bank (99,360) (37,326) (7,908)
----------- ----------- -----------
Total adjustments ............................. (93,825) (36,556) (7,908)
----------- ----------- -----------
Net cash flows provided by (used in) operating
activities ................................... 53,193 (5,810) 136,210
----------- ----------- -----------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment . -- (414) --
Proceeds from disposal of furniture, fixture and
equipment ...................................... 414 -- --
Capital contributions to the Bank ............... (2,000) (390,791) --
----------- ----------- -----------
Net cash flows used in financing activities ... (1,586) (391,205) 0
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of Senior Notes ......... -- 190,440 --
Proceeds from other borrowings .................. -- 19,029 --
Repayment of other borrowings ................... -- (19,029) --
Issuance of class C common stock ................ -- 210,376 --
Redemption of class C common stock .............. (60,801) -- --
Dividends on class C common stock ............... (29,185) -- (136,210)
Dividends paid to minority shareholders
of the Bank .................................... 34,584 -- --
----------- ----------- -----------
Net cash flow (used in) provided by financial
activities .................................... (55,402) 400,816 (136,210)
Net change in cash and cash equivalents ......... (3,795) 3,801 0
Cash and cash equivalents at beginning of year .. 3,801 -- --
----------- ----------- -----------
Cash and cash equivalents at end of year ........ $ 6 $ 3,801 $ 0
=========== =========== ===========
</TABLE>
F-46
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(34) SUBSEQUENT EVENTS (UNAUDITED)
Lomas 1996 Purchase
On January 31, 1996, FNMC consummated an agreement to purchase LMUSA's
remaining $14.1 billion loan servicing portfolio (including a sub-servicing
portfolio of $2.4 billion), a master servicing portfolio of $2.7 billion,
$5.9 million in foreclosed real estate, $45.3 million in net other servicing
receivables, $5.8 million in mortgage loans, and $6.2 million in net other
assets for a purchase price of approximately $160.8 million payable in
installments (the "Lomas 1996 Purchase"). The initial installment of $49.8
million was paid with existing cash.
SFFed Acquisition
On August 27, 1995 the Bank entered into an Agreement and Plan of Merger
(the "Merger Agreement") with SFFed Corp. ("SFFed"), a savings and loan
holding company, pursuant to which the Bank acquired (the "SFFed
Acquisition") SFFed and its wholly owned federal savings association, San
Francisco Federal Savings and Loan Association ("San Francisco Federal"). San
Francisco Federal operated 35 branches in the Northern California area. At
December 31, 1995, San Francisco Federal had approximately $4.0 billion in
assets and approximately $2.7 billion in deposits.
The SFFed Acquisition was consummated on February 1, 1996. Under the
Merger Agreement, holders of SFFed common stock outstanding at the effective
time of the merger (other than shares for which dissenter's rights were
perfected, shares held by First Nationwide and shares held as treasury stock)
received $32 per share. The holders of options on the common stock of SFFed
received for each share subject to an option the difference between $32 and
the applicable per share option price. The aggregate consideration paid under
the Merger Agreement was approximately $264 million. Following completion of
the SFFed Acquisition, SFFed was liquidated and San Francisco Federal was
merged into First Nationwide. The Bank financed the SFFed Acquisition with
existing cash and other borrowings which may ultimately be replaced by
proceeds from the sale of certain mortgage-backed securities or other assets.
Issuance of Senior Subordinated Notes
On January 31, 1996, FN Holdings issued $140 million of its 9 1/8 % Senior
Subordinated Notes Due 2003. On February 1, 1996, FN Holdings contributed the
net proceeds of such offering totalling $133 million in cash as additional
paid in capital to the Bank to ensure that the Bank retains its
"well-capitalized" status upon consummation of the SFFed Acquisition and
Lomas 1996 Purchase described in the preceding paragraphs.
Pending Acquisition -- Home Federal
On December 19, 1995, the Bank entered into a merger agreement with Home
Federal Financial Corporation ("HFFC"), pursuant to which the Bank will
acquire (the "Home Federal Acquisition") HFFC and its wholly owned federally
chartered savings association subsidiary, Home Federal Savings and Loan
Association of San Francisco ("Home Federal"). At December 31, 1995, HFFC had
approximately $718 million in assets and $625 million in deposits and
operated 15 branches in the Northern California area. The aggregate
consideration to be paid in connection with the Home Federal Acquisition is
estimated to approximate $70.6 million. The Home Federal Acquisition is
subject to approval by HFFC's shareholders and regulatory approval by the
Office of Thrift Supervision, and is expected to close in the second quarter
of 1996.
F-47
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Branch Sales
From September through December of 1995, the Bank entered into the
following agreements (the "Branch Sale Agreements") to sell retail deposits
("Deposits") and the related retail banking assets comprised of cash on hand,
loans on deposits and facilities ("Related Assets") in Ohio, New York, New
Jersey and Michigan as follows:
<TABLE>
<CAPTION>
CARRYING VALUE AT DECEMBER
DATE OF NUMBER OF GENERAL 31, 1995
PURCHASER AGREEMENT BRANCHES LOCATION
-----------------------------------------------------------------------------------------------------------------
RELATED
DEPOSITS ASSETS
--------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Fifth Third Bank of Northeastern Ohio 9/22/95 28 Ohio $1,414,695 $18,480
North Fork Bank ....................... 9/28/95 10 Long Island, 602,014 8,222
New York
Middletown Savings Bank ............... 9/29/95 8 Upstate New 485,975 5,594
York
Independence Savings Bank ............. 10/11/95 3 Brooklyn, New 330,073 3,308
York
Republic National Bank ................ 10/31/95 3 Manhattan, New 282,580 1,795
York
Midlantic Bank ........................ 11/3/95 4 New Jersey 509,597 5,556
Independence Savings Bank ............. 11/15/95 2 Staten Island, 286,723 3,718
New York
Charter One Bank ...................... 12/14/95 21 Michigan 783,965 12,667
------------ --------------
Total ............................... $4,695,622 $59,340
============ ==============
</TABLE>
The premiums to be paid by the purchasers in these transactions total
approximately $367 million. These sales are subject to regulatory approval
and are expected to close during the first half of 1996.
As of March 8, 1996, the Bank has consummated the sale of 38 branches
pursuant to the Branch Sale Agreements, totalling $2.1 billion and $28.1
million in carrying value of Deposits and Related Assets at their respective
sale dates, respectively. The Bank financed these sales through additional
borrowings from the FHLB and reverse repurchase agreements. Through March 8,
1996, pre-tax gains totalling $180.9 million have been recognized in
connection with these transactions.
Loans to Affiliate
On March 1, 1996, the Company extended a loan to an affiliate in the
amount of $46.8 million.
F-48
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
First Nationwide Bank, A Federal Savings Bank and
First Madison Bank, FSB
We have audited the accompanying consolidated statements of financial
condition of the acquired business of First Nationwide Bank ("the Acquired
Business"), as of December 31, 1993, and the related consolidated statements
of operations, equity, and cash flows for each of the two years in the period
ended December 31, 1993. The historical financial statements of First
Nationwide Bank ("Old FNB") are the responsibility of the management of Old
FNB. The assumptions discussed in Note 1 under "Basis of Presentation" (to
the extent related to the Asset Purchase Agreement, as defined therein, and
the transactions contemplated thereby) used in preparing the accompanying
consolidated financial statements of the Acquired Business are the
responsibility of the management of First Madison Bank. Our responsibility is
to express an opinion on the financial statements of the Acquired Business
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Acquired
Business, at December 31, 1993, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1993, in conformity with generally accepted accounting
principles and the basis of presentation discussed in Note 1.
As discussed in Notes 16 and 18 to the consolidated financial statements,
the Acquired Business changed its method of accounting for income taxes and
postretirement health benefits in 1992.
COOPERS & LYBRAND LLP
San Francisco, California
May 10, 1994
F-49
<PAGE>
THE ACQUIRED BUSINESS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
1993
-------------
<S> <C>
ASSETS
Cash and amounts due from depository institutions ............................. $ 230,624
Other short-term investment securities ........................................ 40,000
-------------
Total cash and cash equivalents ............................................. 270,624
Investment securities, net (approximate market value $377 million in 1993) ... 376,429
Mortgage-backed securities, net (approximate market value $1.8 billion in
1993) ........................................................................ 1,776,140
Loans receivable, net ......................................................... 11,408,852
Loans and investment securities held for sale, net ............................ 155,316
Accrued interest receivable ................................................... 84,835
Property acquired in settlement of loans, net ................................. 63,851
Investment in Federal Home Loan Bank system, at cost .......................... 152,629
Office premises and equipment, net ............................................ 108,711
Real estate held for investment and sale, net ................................. 9,691
Goodwill ...................................................................... 216,777
Other assets .................................................................. 282,632
-------------
Total Assets ................................................................ $14,906,487
=============
LIABILITIES AND EQUITY
Liabilities:
Customer deposit ............................................................ $10,561,620
Securities sold under agreements to repurchase .............................. 835,341
Other borrowings ............................................................ 2,477,615
Advance payments by borrowers ............................................... 45,056
Accounts payable and accrued liabilities .................................... 82,196
-------------
Total Liabilities ......................................................... 14,001,828
Contingent Liabilities ........................................................ --
Equity ........................................................................ 904,659
-------------
Total Liabilities and Equity ................................................ $14,906,487
=============
</TABLE>
See Notes to Consolidated Financial Statements.
F-50
<PAGE>
THE ACQUIRED BUSINESS
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1993 1992
----------- ------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Real estate loans ........................................................... $ 891,588 $1,179,468
Mortgage-backed securities .................................................. 80,458 64,059
Consumer and other loans .................................................... 42,437 51,230
FSLIC/RF notes and investment securities .................................... 32,395 105,226
Short-term investment securities ............................................ 20,101 36,387
Receivable/Transferred Asset ................................................ 18,062 65,050
FSLIC/RF yield maintenance and net earnings on unconsolidated
subsidiaries ............................................................... -- 7,742
----------- ------------
Total interest and dividend income ........................................ 1,085,041 1,509,162
INTEREST EXPENSE
Customer deposits ........................................................... 482,431 755,480
Securities sold under agreements to repurchase .............................. 12,730 5,370
Short-term borrowings ....................................................... 370 3,396
Other borrowings ............................................................ 133,125 176,547
----------- ------------
Total interest expense .................................................... 628,656 940,793
----------- ------------
Net interest income ........................................................... 456,385 568,369
Provision for loan losses ..................................................... 81,506 85,228
----------- ------------
Net interest income after provision for loan losses ........................... 374,879 483,141
OTHER INCOME
Mortgage banking operations, net ............................................ 14,795 40,941
Customer banking fees ....................................................... 52,104 37,558
Other loan fees and charges ................................................. 14,044 13,307
Net gain (loss) on sales of:
Customer deposits ......................................................... 22,281 527
Investment securities ..................................................... 109 7,921
Consumer loans ............................................................ 1,105 (3,094)
Other assets .............................................................. (1,547) (18,959)
Real estate operations, net ................................................... (3,578) (1,330)
Provision for losses on foreclosed property ................................... (45,110) (80,654)
Other ......................................................................... 90,389 50,635
----------- ------------
Total other income ........................................................ 144,592 46,852
OTHER EXPENSE
Compensation and benefits ................................................... 142,568 158,857
Premises and equipment ...................................................... 73,242 92,967
SAIF insurance premiums ..................................................... 31,820 36,036
Communications .............................................................. 15,327 18,919
Marketing and advertising ................................................... 8,928 14,949
Goodwill amortization ....................................................... 16,945 20,496
Other general and administrative ............................................ 43,033 79,377
----------- ------------
Total other expense ....................................................... 331,863 421,601
----------- ------------
Earnings (loss) before income taxes and cumulative effect of accounting
changes ...................................................................... 187,608 108,392
Federal and state income tax expense (benefit) ................................ 40,408 (27,451)
----------- ------------
Earnings before cumulative effect of accounting changes ....................... 147,200 135,843
Cumulative effect of accounting changes, net of income taxes .................. -- 10,128
----------- ------------
Net Earnings .................................................................. $ 147,200 $ 145,971
=========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-51
<PAGE>
THE ACQUIRED BUSINESS
CONSOLIDATED STATEMENTS OF EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
EQUITY OF
ACQUIRED BUSINESS
-----------------
<S> <C>
Balance--December 31, 1991 960,863
Capital contribution ..... 40,625
Cash dividends paid ....... (240,000)
Net earnings .............. 145,971
-----------------
Balance--December 31, 1992 907,459
Cash dividends paid ....... (150,000)
Net earnings .............. 147,200
-----------------
Balance--December 31, 1993 $ 904,659
=================
</TABLE>
See Notes to Consolidated Financial Statements.
F-52
<PAGE>
THE ACQUIRED BUSINESS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1992
------------- -------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS AT JANUARY 1 .......................... $ 2,142,498 $ 596,993
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ................................................... 147,200 145,971
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Cumulative effect of accounting changes ....................... -- (10,128)
Provisions for losses ......................................... 126,616 168,083
Depreciation and amortization ................................. 99,886 105,831
Accretion of fees and discounts and amortization of premiums . (14,718) (60,006)
Gain on sales of loans, mortgage-backed securities and
investment securities ........................................ (5,917) (22,872)
Provision for deferred income taxes ........................... (14,156) (50,747)
Mortgage banking activities:
Loans originated or purchased for resale ..................... (2,129,216) (2,588,452)
Proceeds from sales of loans held for sale ................... 2,189,480 2,665,227
Changes in assets and liabilities:
Decrease in accounts payable and accrued liabilities ........ (178,637) (232,050)
Decrease in accrued interest receivable ...................... 17,089 44,262
Increase (decrease) in accrued interest payable .............. 17,134 (48,688)
Decrease (increase) in accounts receivable ................... 3,796 (53,873)
Other ........................................................ 157,803 295,100
------------- -------------
Net cash provided by operating activities .................... 416,360 357,658
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments, net of originated loans .................... 480,730 806,826
Proceeds from sales of loans and mortgage-backed securities ... 71,485 321,164
Principal payments on mortgage-backed securities ............... 318,965 203,224
Purchases of loans and mortgage-backed securities .............. (985,881) (583,925)
Decrease (increase) in receivable/transferred assets .......... 330,011 778,239
Changes in real estate held for investment and sale and
property acquired in settlement of loans:
Acquisitions and improvements ................................. (93) --
Sales and disposals, net ...................................... 238,884 407,903
Proceeds from FDIC settlement:
FSLIC/RF notes and accrued interest ........................... -- 2,177,708
Repurchase of assets and other settlement proceeds ........... 357,480 933,848
Changes in investment securities:
Purchases ..................................................... (66,654) (1,329,820)
Maturities and sales .......................................... 234,432 1,332,671
Purchases and sales of premises and equipment, net ............ 27,115 8,505
Other .......................................................... 7,590 50,182
------------- -------------
Net cash provided by investing activities ...................... 1,014,064 5,106,525
------------- -------------
</TABLE>
continued
See Notes to Consolidated Financial Statements
F-53
<PAGE>
THE ACQUIRED BUSINESS
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1992
------------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Change in customer deposits, net ................... (1,576,627) (2,834,312)
Sale of customer deposits .......................... (2,180,768) (24,599)
Purchase of customer deposits ...................... 233,111 --
Principal payments on borrowings ................... (929,231) (1,110,777)
Net increase (decrease) in short-term borrowings ... 785,432 (15,000)
Proceeds from issuance of borrowings ............... 524,708 284,045
Capital contributions .............................. -- 40,625
Cash dividends paid ................................ (150,000) (240,000)
Other .............................................. (8,923) (18,660)
------------- -------------
Net cash used by financing activities .............. (3,302,298) (3,918,678)
------------- -------------
Net (decrease) increase in cash and cash equivalents (1,871,874) 1,545,505
------------- -------------
CASH AND CASH EQUIVALENTS AT DECEMBER 31 ............. $ 270,624 $ 2,142,498
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-54
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--STATEMENT OF ACCOUNTING POLICIES
Basis of Presentation:
First Nationwide Bank, A Federal Savings Bank ("Old FNB") is a federally
chartered capital stock savings bank. Old FNB is a wholly-owned subsidiary of
First Nationwide Financial Corporation ("FNFC") which, in turn, is a
wholly-owned subsidiary of Ford Motor Company ("Ford"). On April 14, 1994,
the "Asset Purchase Agreement" between First Madison Bank, FSB ("First
Madison") and Old FNB was executed. Pursuant to this agreement, Old FNB
agreed to sell substantially all of its assets and liabilities to First
Madison with the exception of certain excluded asset and liability amounts as
defined in the agreement. The excluded assets include, principally, certain
commercial and other mortgages, investments in certain subsidiaries,
foreclosed commercial real estate, and real estate held for development.
Certain liabilities, principally amounts due to affiliated companies and
income taxes payable as of December 31, 1993, were also excluded.
The excess of assets over liabilities acquired by First Madison from Old
FNB represents only a portion of the assets and liabilities of Old FNB.
Accordingly, the stockholder's equity section of Old FNB has been eliminated
and replaced with "equity of the Acquired Business."
These financial statements have been prepared in connection with this
Asset Purchase Agreement. They represent the historical financial statements
of Old FNB adjusted to eliminate the impact of the excluded assets and
liabilities on the financial position and the results of operations and cash
flows for all years presented. In addition, certain assets (including their
impact on the results of operations and cash flows) which were transferred to
FNFC in contemplation of this sale, principally real estate held for
development, non-performing commercial and multi-family mortgages, and a
portfolio of mortgage derivative securities, have been eliminated for all
periods presented. The adjustments to 1992 financial statements also reflect
a reduction in long-term debt (to the extent such debt was eventually paid
down when such assets were transferred) and an increase in an interest
bearing Receivable/Transferred Asset corresponding to the amount transferred.
Interest income (based on the interest rate of investments maturing within
one year) and interest expense (based on the actual rates associated with the
debt reduced) also reflect this adjustment. The resulting entity is referred
to herein as the Acquired Business.
Below is a discussion of the various assets transferred to FNFC and its
subsidiaries.
On June 30, 1993, Old FNB sold approximately $34 million of foreclosed
real estate assets to FN Development Company, Delta ("FND-Delta"), a
wholly-owned subsidiary of FNFC, at net book value.
On December 30, 1993, Old FNB sold approximately $466 million of
commercial and multi-family real estate loans, foreclosed real estate assets
and real estate development assets to Granite Management and Disposition,
Inc. ("GMD"), a subsidiary of FNFC, Epsilon Properties Inc., a wholly-owned
subsidiary of GMD, and FND-Delta, a subsidiary of FNFC, at net book value.
On October 31, 1992, Old FNB sold approximately $453 million of real
estate development assets to FNFC at their net book value.
In September 1992, Old FNB sold approximately $318 million of mortgage
derivative securities to FNFC at a sales price equal to book value of the
securities.
Below is a summary of the impact on the net earnings of Old FNB for the
years ending December 31, 1993 and 1992 related to both the excluded net
assets and transferred assets.
<TABLE>
<CAPTION>
ADJUSTMENTS ADJUSTMENTS NET EARNINGS
FOR THE NET EARNINGS RELATED TO RELATED TO FOR THE
YEAR (LOSS) OF OLD EXCLUDED NET TRANSFERRED ACQUIRED
ENDED FNB ASSETS ASSETS BUSINESS
- ------------ --------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
1993 ........ $82,563 $30,542 $ 34,095 $147,200
1992 ........ $(7,928) $43,167 $110,732 $145,971
</TABLE>
F-55
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--STATEMENT OF ACCOUNTING POLICIES (Continued)
Regulatory Requirements:
FNB is subject to regulation by the Federal Deposit Insurance Corporation
("FDIC") and the OTS, an office of the Department of the Treasury.
As a member of the Federal Home Loan Bank System ("FHLB"), savings and
loans are required to maintain an investment in the capital stock of the
Federal Home Loan Banks. The investment is carried at cost. Savings and loans
also maintain insurance on customer deposit accounts with the Savings
Association Insurance Fund ("SAIF"), which requires semi-annual payments of
deposit insurance premiums. Savings and loans are required by the Federal
Reserve Bank to maintain non-interest bearing cash reserves equal to a
percentage of certain deposits. The average reserve balance for the Acquired
Business was $54 million in 1993.
Principles of Consolidation:
The consolidated financial statements of the Acquired Business include the
accounts of its wholly-owned subsidiaries, FNB Mortgage Corp. ("FNBMC"), FN
Projects, Inc., FN Investment Center, Trans Network Insurance Services, D.L.
Equity Corporation and Master Mortgage Company. All material intercompany
accounts and transactions have been eliminated in consolidation.
Cash, Cash Equivalents and Statement of Cash Flows:
For purposes of reporting cash flows, cash and cash equivalents include
cash due from depository institutions, U.S. Government and agency securities,
federal funds sold, securities purchased under agreements to resell, and
highly liquid short-term debt securities. At December 31, 1993, other
short-term investment securities included $40 million of federal funds sold
with a weighted average interest rate of 2.75%. Cash equivalents include
short- term investments with remaining terms to maturity of three months or
less from the date of acquisition. Other short-term investment securities
include substantially all cash balances held in other financial institutions
which exceed existing deposit insurance coverage.
For purposes of reporting cash flows, short-term investments have an
original term to maturity of three months or less. Cash flows from financial
instruments that are accounted for as hedges of identifiable transactions are
classified in the same category as the cash flows from the items being
hedged.
Disclosures About Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107 ("SFAS No.107"),
"Disclosures about Fair Value of Financial Instruments", requires the
disclosure in the financial statements, or notes thereto, of fair value
information for financial instruments, as defined, whether or not recognized
in the balance sheet, for which it is practical to estimate fair value. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparison to independent markets
and, in many cases, could not be realized in immediate settlement of the
instruments. SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent and should not be
construed to represent, the full underlying value of the Acquired Business.
Investment Securities:
Investment securities are stated at cost, net of any unamortized premiums
or discounts. The Acquired Business has the ability to hold these assets to
maturity. Premiums and discounts on these securities are
F-56
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--STATEMENT OF ACCOUNTING POLICIES (Continued)
amortized over the expected life of the underlying securities using methods
approximating the interest method. Investment securities identified as being
held for sale are stated at the lower of amortized cost or market value.
Gains or losses on the sale of such securities are based on the specific
identification method.
Fair value of investment securities is determined by reference to quoted
market prices, if available. If quoted market prices are not available, fair
value is estimated using quoted market prices for similar securities. For
short-term investments, the carrying amount is a reasonable estimate of fair
value.
Mortgage-backed Securities:
Mortgage-backed securities are stated at cost, net of any unamortized
premiums and discounts. The Acquired Business has the ability to hold these
assets to maturity. Premiums and discounts on these securities are amortized
over the expected life of the underlying mortgages using methods
approximating the interest method. A portion of the mortgage-backed
securities portfolio resulted from the securitization of certain qualifying
mortgage loans in the Acquired Business' portfolio. Gains or losses on the
sale of mortgage-backed securities are based on the specific identification
method.
For mortgage-backed securities, fair value is determined by reference to
quoted market prices, if available. If quoted market prices are not
available, fair value is estimated using quoted market prices for similar
securities.
Loans Receivable:
Loans receivable are recorded at cost, net of discounts and premiums,
undisbursed loan funds, advances to borrowers for taxes and insurance, net
deferred fees and allowance for loan losses. The Acquired Business holds
loans receivable primarily for investment purposes and has both the intent
and ability to hold these loans until maturity. Unforeseen circumstances may
arise in the future that would cause the sale of loans prior to their
maturity. The Acquired Business' real estate loan portfolio consists
primarily of long-term loans (15-30 years) secured by first trust deeds on 1
to 4 unit residences, multi-family property, commercial property, and land.
The Acquired Business also makes first and second trust deed loans with
shorter terms.
A significant portion of the Acquired Business' real estate loan portfolio
is comprised of adjustable- rate mortgages. The interest rate and payment
terms of these mortgages adjust on a periodic basis in accordance with
various published indices. The majority of these adjustable-rate mortgages
have terms which limit the amount of interest rate adjustment that can occur
each year and over the life of the mortgage. During periods of limited
payment increases, negative amortization may occur on certain adjustable-rate
mortgages.
The Acquired Business' loan portfolio also includes consumer and
commercial loans that are collateralized by passbook accounts, mobile homes,
recreational vehicles, motor vehicles and other non-real estate commercial
assets. Finance charges included in consumer loans receivable are deferred
and amortized into income over the term of the loan except in the case of
delinquent installments for which collection is not reasonably assured.
The fair value of performing loans has been estimated by discounting
future cash flows using interest rates that consider the current credit and
interest rate risk inherent in the loans, and current economic and lending
conditions. In general, the fair value of nonperforming loans has been
estimated using management's current estimate of future cash flows from the
underlying collateral discounted at a rate commensurate with the risks of the
specific property identified.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other
F-57
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--STATEMENT OF ACCOUNTING POLICIES (Continued)
termination clauses and may require payment of a fee by the customer. Since
some of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements.
Interest income is accrued based on the outstanding principal amount of
loans and their contractual terms. Loans are generally placed on non-accrual
status when the borrowers are contractually past due 90 days and when payment
in full of principal or interest is not expected. The accrual of interest is
discontinued and any accrued and unpaid interest is reversed out of current
income when the loans are placed on non-accrual status. Such interest, if
ultimately collected, is credited to interest income in the period of
recovery.
Loan Fees:
The Acquired Business charges fees for originating loans. Loan origination
fees, net of direct underwriting and closing costs, are deferred and
amortized to interest income using the interest method over the contractual
term of the loans, adjusted for actual loan prepayment experience.
Unamortized fees on loans sold or paid in full are recognized as income.
Adjustable-rate loans with lower initial interest rates during the
introductory period result in the amortization of a substantial portion of
the net deferred fee during the introductory period.
Other loan fees and charges, which represent income from the prepayment of
loans, delinquent payment charges, and miscellaneous loan services are
recognized as income when collected.
Allowance for Loan Losses:
The Acquired Business charges current earnings with a provision for
estimated credit losses on loans receivable. The provision considers both
specifically identified problem loans and credit risks not specifically
identified in the loan portfolio. The allowance for loan losses takes into
consideration numerous factors including the financial condition of the
borrowers, the fair value of collateral, recourse to guarantors, the
estimated net cost of holding and maintaining properties and collateral prior
to the anticipated date of sale, analysis of delinquency trends, geographic
and collateral-type concentrations and past loss experience. The allowance
also considers the ability of the Acquired Business to "put" $500 million of
non-performing and classified assets to an affiliate of FNB (also, see Note
10). Losses are charged to the allowance when the loan is considered
uncollectible or at the time of foreclosure. Recoveries on receivables and
loans previously charged-off as uncollectible are credited to the allowance
for loan losses.
Mortgage Banking Activities:
The Acquired Business sells whole loans and participating interests in
whole loans. The Acquired Business is also active in the creation of
mortgage-backed securities through the securitization of the loans it
originates. Mortgage banking activities are undertaken to generate fee
income, to effectively manage the Acquired Business' interest rate risk
levels, overall funding requirements and to meet certain regulatory
requirements and limitations.
During the loan origination process, loans and unfunded loan commitments
identified as held for investment are recorded at cost; loans and commitments
to fund loans identified for sale are carried at the lower of aggregate cost
or market value on an aggregate basis. Commitments to purchase or sell loans
are included in determining aggregate cost or market value. In general, the
Acquired Business originates fixed rate loans and fixed rate mortgage-backed
securities for sale in the secondary market. Adjustable rate
F-58
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--STATEMENT OF ACCOUNTING POLICIES (Continued)
loans and mortgage-backed securities are originated primarily for investment
purposes and the Acquired Business has both the intent and ability to hold
them until maturity. In certain instances, fixed rate loans are held for
investment purposes and adjustable rate loans and mortgage-backed securities
originated are identified as being held for sale.
Forward loan sale commitments are contracts for delayed delivery of
mortgage-backed securities in which the seller agrees to make delivery at a
specified future date of a specified instrument, at a specified price or
yield. The Acquired Business uses forward loan sale commitments in its
mortgage banking operations to reduce the interest rate risk on unfunded
fixed rate loan commitments before they are sold in the secondary market.
This action is taken to effectively manage the total interest rate risk
levels of the Acquired Business' asset/liability structure.
Gains or losses resulting from loan and mortgage-backed securities sales
are recognized at time of sale based on the difference between the net sales
proceeds and the net carrying value of the loans or interests sold. When the
rights to service the underlying loans are retained, the cash gain or loss is
adjusted based on the net present value of the expected amounts to be
received or paid. The Acquired Business calculates these amounts by comparing
the contractual interest rates to be paid by the borrowers and the interest
rates to be paid to the investors, less an amount equal to the present value
of a normal servicing fee. The resulting deferred premium is amortized to
income over the estimated remaining servicing lives of the loans sold using
the interest method, adjusted for actual and anticipated prepayments.
Loans and mortgage-backed securities may be sold with limited recourse
obligations. The credit risk associated with these limited recourse
obligations is generally less than the credit risk the Acquired Business
would have had if it held the loans in its own portfolio.
Real Estate Held for Investment and Sale:
Real estate held for investment and sale consists of partnership
investments which are accounted for by the equity method. Valuation
allowances for estimated losses on real estate are provided when the cost
exceeds net realizable value. Net realizable value is based on current market
conditions and estimated sales values of similar properties, less estimated
holding costs to anticipated date of sale. Net income from real estate
operations includes net gains from the sale of real estate partnerships,
equity in net earnings or losses from real estate partnerships, and
provisions for estimated losses. FNFC has guaranteed First Madison collection
on $5.5 million of the December 31, 1993, balance in real estate held for
investment and sale.
Property Acquired in Settlement of Loans:
Property acquired in settlement of loans is recorded at the lower of cost
or fair value less estimated disposal costs at the time of foreclosure.
Subsequent to foreclosure, the Acquired Business charges current earnings
with a provision for estimated losses when the carrying value of the
collateral property exceeds its estimated fair value. Net operating income or
loss from the properties is recorded in other income.
Interest Rate Exchange Agreements:
The Acquired Business enters into interest rate exchange agreements to
assist in matching interest expense on specific interest-bearing liabilities
with the interest rate adjustments of specific interest-earning assets.
These agreements may consist of interest rate swaps, interest rate caps and
interest rate options. Interest rate swaps are agreements in which the
Acquired Business and third parties agree to exchange interest payments (one
at a variable rate, the other at a fixed rate) on notional principal amounts.
Interest rate caps are agreements under which the Acquired Business will
receive interest
F-59
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--STATEMENT OF ACCOUNTING POLICIES (Continued)
payments from third parties if interest rates exceed certain agreed upon
rates on notional amounts. Interest rate options are contracts that allow the
holder of the option to purchase or sell a financial instrument at a
specified price within a specified period of time from the seller or "writer"
of the option.
The effect on interest expense relating to payments or receipts from
interest rate exchange agreements is recognized currently. Gains or losses at
early termination of these agreements are deferred and amortized to income or
expense over the shorter of the original maturity of the agreement or the
maturity of the hedged assets or liabilities. Fees paid, if any, are
amortized on a straight-line basis over the term of the agreement.
For purposes of calculating fair values under FASB 107, the fair value of
interest rate exchange agreements is the estimated amounts that the Acquired
Business would receive or pay to terminate the agreements at the reporting
date, taking into consideration current interest rates and the current
creditworthiness of the exchange agreement counterparties.
Office Premises and Equipment:
Premises, equipment, leasehold improvements and capitalized software are
stated at cost, less accumulated depreciation and amortization. Premises,
equipment, leasehold improvements and capitalized software are depreciated or
amortized on a straight-line basis over the lesser of the lease term or the
estimated useful lives of the various classes of assets. Maintenance and
repairs on premises and equipment are charged to expense in the period
incurred.
From time to time, the Acquired Business designates certain owned and
leased office facilities as surplus facilities no longer needed to support
ongoing business operations. Valuation allowances are established to adjust
the net carrying value of surplus office facilities to the lower of aggregate
cost or market value.
Financial Instruments with Off-Balance-Sheet Risk:
The Acquired Business is a party to financial instruments with
off-balance-sheet risk in the normal course of business and to meet the
financial needs of its customers. These financial instruments include
commitments to extend credit, options written, regular and standby letters of
credit, interest rate exchange agreements, and forward commitments to
purchase or sell loans, investment securities or mortgage-backed securities.
These instruments may involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the statements of
financial condition. The contract or notional amounts of those instruments
reflect the extent of involvement the Acquired Business has in particular
classes of financial instruments.
The Acquired Business generally uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments, which may require that it obtain collateral that will reduce its
exposure to credit loss. The Acquired Business' exposure to credit loss, in
the event of nonperformance by the other party to the financial instrument,
for commitments to extend credit, and regular and standby letters of credit
is represented by the difference between the contractual commitment amount of
those instruments and the fair value of the collateral. If there is no
collateral, or if the underlying collateral is determined to have little or
no value, or the Acquired Business is not able to obtain possession of the
collateral, the maximum exposure to credit loss is represented by the
contractual commitment. For interest rate exchange transactions, forward
commitments, and options written, the risk associated with these instruments
arises from movements in interest rates and dealing with counterparties and
their ability to meet the terms of the contracts. The notional principal
amounts often are used to express the volume of these transactions, but the
amounts subject to credit risk are much smaller. The Acquired Business
controls the credit risk of its interest rate exchange agreements and forward
commitments through credit approvals, limits, and monitoring procedures.
F-60
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--STATEMENT OF ACCOUNTING POLICIES (Continued)
The market risk associated with the forward sale of unfunded loan
commitments used in the Acquired Business' mortgage banking operations occurs
when the estimated amount of the unfunded loan commitments is not the same as
the outstanding forward commitments to sell loans and mortgage-backed
securities and from the possible inability of counterparties to meet the
terms of their contracts. An increase in interest rates may cause greater
than expected fundings on loan commitments. This could result in a loss since
the unsold loans not covered by forward sale commitments would be required to
be adjusted to the lower of aggregate cost or market value. A decrease in
interest rates may cause lower than expected fundings on loan commitments.
This could result in a loss equal to the fee paid to satisfy the unfulfilled
forward sale commitment. The fair value of commitments to originate, purchase
or sell loans and mortgage-backed securities is estimated using the
difference between current levels of interest rates and the committed rates.
Goodwill and Intangible Assets:
Goodwill resulting from acquisitions is $217 million at December 31, 1993.
A portion of this amount totalling $176 million, is amortized on the
straight-line method over a period of approximately 25 years. The remaining
goodwill of $41 million is amortized using the interest method over the
estimated composite remaining life of the long-term, interest-earning assets
acquired, which is approximately 7 years. The Acquired Business periodically
evaluates its goodwill for possible impairment based on expected net
earnings, on an undiscounted basis, over the remaining life of the goodwill.
Identified intangible assets totalling $75 million at December 31, 1993
resulting from certain acquisitions are amortized using the straight-line
method over an estimated remaining composite life of approximately 5 years.
Core deposit intangible assets totalling $8 million at December 31, 1993 are
amortized using the interest method over an estimated remaining composite
life of approximately 7 years.
Securities Sold Under Agreements of Repurchase:
The Acquired Business enters into sales of securities under agreements to
repurchase ("reverse repurchase agreements"). Reverse repurchase agreements
are treated as financings, and the obligations to repurchase securities sold
are reflected as liabilities in the statements of financial condition. The
securities underlying the reverse repurchase agreements are carried as
assets.
Income Taxes:
Old FNB and its subsidiaries are included with FNFC and Ford in filing
consolidated income tax returns. Income taxes have been computed on the
separate results of the Acquired Business and its subsidiaries based on the
provisions of Old FNB's tax sharing agreements with FNFC and Ford. The
federal tax sharing agreements generally provide that the Acquired Business
will be charged or reimbursed based on the tax effects of its earnings or
losses in the consolidated returns. The state tax sharing agreements provide
that charges or reimbursements will be allocated as if Old FNB and its
subsidiaries filed state taxes on a separate return basis. Deferred income
taxes reflect the estimated future tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and such amounts as measured by tax laws and regulations. The recoverability
of deferred tax assets is evaluated on a consolidated basis with FNFC and
Ford.
New Accounting Standards:
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 114 ("SFAS No. 114"),
"Accounting by Creditors for Impairment of a Loan". The standard requires
that impaired loans be measured based on the present value of expected cash
flows discounted at the loan's effective interest rate. The Acquired Business
does not plan to adopt this standard until January 1, 1995.
F-61
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--STATEMENT OF ACCOUNTING POLICIES (Continued)
In May 1993, the FASB issued Statement of Financial Accounting Standards
No. 115 ("SFAS No. 115"), "Accounting for Certain Investments in Debt and
Equity Securities". The standard establishes financial accounting and
reporting requirements for investments in equity securities (excluding those
accounted for under the equity method and investments in consolidated
subsidiaries) that have readily determinable fair values and for all
investments in debt securities. The Acquired Business adopted SFAS No. 115 in
1994. The impact of adoption was not material.
NOTE 2--RECEIVABLES FROM THE FSLIC/RF
In 1988, FNFC and Old FNB acquired several financial institutions in
federally assisted acquisitions. All of the acquired institutions were either
immediately or subsequently merged with and into the Acquired Business. In
connection with the acquisitions, FNFC and Old FNB entered into various
assistance agreements with the FSLIC Resolution Fund ("FSLIC/RF"), a special
fund administered by the FDIC. Under the terms of the assistance agreements,
the FSLIC/RF provided Old FNB with assistance payments consisting primarily
of interest payments on FSLIC/RF notes, and yield maintenance and loss
protection on certain underperforming and other assets including investments
in unconsolidated subsidiaries of the acquired savings and loan institutions.
This revenue provided reimbursement for interim losses without which the
assets could not have been acquired economically. The FSLIC/RF notes were
issued to FNFC and Old FNB at the time of the acquisitions in an amount
generally equal to the tangible negative net worth of the acquired
institutions' assets after reflecting the fair value or mark to market
adjustments on certain assets and liabilities.
Effective June 30, 1992, FNFC and Old FNB entered into a settlement
agreement with the FDIC Manager ("FDIC") which covered the remaining active
assistance agreements with the FSLIC/RF. In accordance with the terms of the
settlement agreement, the FDIC prepaid approximately $2.2 billion in FSLIC/RF
notes and related accrued interest. In addition, the FDIC paid $0.9 billion
primarily for the repurchase of certain covered assets. The FDIC and Old FNB
also reached agreement on certain federal and state tax issues associated
with the covered assets and related assistance payments. There was no gain or
loss recognized on the settlement. The agreement also provided for various
options related to the treatment of approximately $490 million of covered
assets.
Effective January 31, 1993, FNFC and Old FNB reached a final settlement
with the FDIC concerning these remaining covered assets. As part of the final
settlement, Old FNB received the book value of these remaining covered
assets.
With the exception of certain indemnity and audit provisions, the 1992 and
1993 settlement agreements with the FDIC effectively terminate the remaining
active assistance agreements with the FSLIC/RF. Management believes there
will be no adjustments material to the financial statements from the
resolution of the final audit. Future assistance payments from the FSLIC/RF
are curtailed. Certain previously received assistance payments may be
recognized as revenue when the final audits of the assistance agreements and
associated payments are completed and remaining issues resolved.
F-62
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--RECEIVABLES FROM THE FSLIC/RF (Continued)
During 1993, approximately $72 million of FSLIC/RF assistance was
recognized in other income. The amount of FSLIC/RF assistance recognized as
revenue by the Acquired Business in 1992 is reflected in the statement of
operations as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1992
-----------------
(DOLLARS IN THOUSANDS)
<S> <C>
Interest and Dividend Income:
FSLIC/RF notes and investment securities ............... $ 63,417
Real estate loans ...................................... 36,873
Mortgage-backed securities ............................. (1,439)
Consumer and other loans ............................... (327)
FSLIC/RF yield maintenance on unconsolidated
subsidiaries ........................................... 25,518
-----------------
124,042
Other Income:
Net gain on sales of investment securities ............. 44,812
Other .................................................. 40,585
-----------------
85,397
-----------------
Total ................................................. $ 209,439
=================
</TABLE>
NOTE 3--INVESTMENT SECURITIES
Investment securities consist of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
-------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
U.S. Government and agency obligations $ 191,166 $ 698 $ 15 $191,849
Collateralized mortgage obligations .. 182,947 440 852 182,535
Municipal securities .................. 2,316 -- -- 2,316
----------- ------------ ------------ --------------
Total investment securities ......... $ 376,429 $ 1,138 $867 $376,700
=========== ============ ============ ==============
</TABLE>
The weighted averagze interest rate on investment securities was 5.11% at
December 31, 1993. Non-taxable interest recognized on municipal securities
during 1993 and 1992 was $0.7 million and $1 million, respectively.
F-63
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--INVESTMENT SECURITIES (Continued)
At December 31, 1993 investment securities at amortized cost and
estimated market value, have scheduled maturities as follows:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) DECEMBER 31, 1993
------------------------------------
ESTIMATED WEIGHTED
AMORTIZED MARKET AVERAGE
COST VALUE YIELD
----------- ----------- ----------
<S> <C> <C> <C>
U.S. Government and agency securities:
Maturing within 1 year ................... -- -- --
Maturing after 1 year but within 5 years . $191 $191 4.17%
Maturing after 5 years but within 10 years -- -- --
Maturing after 10 years .................. -- 1 14.00
----------- -----------
191 192 4.19
----------- ----------- ----------
Collateralized mortgage obligations:
Maturing within 1 year ................... 1 2 8.92
Maturing after 1 year but within 5 years . 174 173 5.38
Maturing after 10 years .................. 8 8 7.00
----------- ----------- ----------
183 183 5.48
Municipal securities:
Maturing after 1 year but within 5 years . 1 1 8.25
Maturing after 5 years but within 10 years -- -- --
Maturing after 10 years .................. 1 1 8.25
----------- ----------- ----------
2 2 8.03
All other securities maturing within 1
year ................................... -- -- --
----------- ----------- ----------
Total .................................. $376 $377 4.83
=========== =========== ==========
</TABLE>
Proceeds from sales of investments in debt securities during 1993 were $41
million, of which $32 million, were related to the sales of investments in
debt securities covered for loss by the FSLIC/RF. There were no material
gains or losses on the sale of investment debt securities in 1993. Gains on
the sale of investments in debt securities not covered for loss were $4
million in 1992. Losses on the sale of investments in debt securities not
covered for loss were $5 million in 1992. Gains on the sale of investments in
debt securities covered for loss were $8 million in 1992. No material losses
were recognized in the sales of investments in debt securities covered for
loss in 1992.
F-64
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--MORTGAGE-BACKED SECURITIES
Mortgage-backed securities consist of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
--------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation $1,236,993 $20,483 $ 946 $1,256,530
Federal National Mortgage Association . 514,915 5,391 348 519,958
Government National Mortgage
Association ........................... 18,609 1,193 1 19,801
Other .................................. 5,623 -- -- 5,623
------------ ------------ ------------ --------------
Total mortgage-backed securities, net $1,776,140 $27,067 $1,295 $1,801,912
============ ============ ============ ==============
</TABLE>
The weighted average interest rate on mortgage-backed securities was 5.52%
at December 31, 1993. Proceeds from sales of mortgage-backed securities
during 1993 were $96 million, of which $90 million were related to the sales
of mortgage-backed securities covered for loss by the FSLIC/RF. During 1993
and 1992, there were no gains or losses realized on sales of mortgage-backed
securities.
At December 31, 1993, $94 million of mortgage-backed securities held
resulted from the securitization of certain qualifying mortgage loans from
the Acquired Business' loan portfolio. At December 31, 1993 the Acquired
Business had $1.5 billion of variable rate mortgage-backed securities. At
December 31, 1993, other mortgage-backed securities contained approximately
$5 million in securities which represent subordinated interests in mortgage
pool securities.
NOTE 5--LOANS RECEIVABLE
Loans receivable consists of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
-----------------
<S> <C>
Real estate loans:
1-4 unit residential .................................... $ 6,533,809
5+ unit residential ..................................... 2,396,385
Commercial .............................................. 2,303,182
Construction ............................................ 24,921
Land .................................................... 10,101
-----------------
11,268,398
Undisbursed loan funds .................................. (7,373)
-----------------
Total real estate loans ................................ 11,261,025
Equity-line loans ......................................... 403,694
Other consumer loans ...................................... 78,027
Commercial loans .......................................... 3,623
-----------------
Total consumer and other loans .......................... 485,344
Amounts advanced to borrowers for taxes and insurance .... 24,732
Unearned fees, unearned income, discounts and premiums,
net ....................................................... (105,007)
Allowance for loan losses ................................. (257,242)
-----------------
Total loans receivable, net ............................. $11,408,852
=================
</TABLE>
F-65
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--LOANS RECEIVABLE (Continued)
The weighted average stated interest rate on loans receivable was 6.43%
at December 31, 1993. At December 31, 1993, the Acquired Business had $8.7
billion of variable rate real estate loans. During 1993 the Acquired Business
sold $10 million of various consumer loans and credit card receivables
recognizing a net gain of $1 million and a net loss of $3 million,
respectively. Loans receivable, net, had a fair value of approximately $11.7
billion at December 31, 1993.
The following table indicates the gross amount of loans which have been
placed on nonaccrual status as of the dates indicated:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) AT DECEMBER 31, 1993
--------------------
<S> <C>
Nonaccrual loans:
Real Estate:
1-4 unit residential ... $313
5+ unit residential .... 18
Commercial and other ... 15
Construction ............ --
--------------------
Total real estate .... 346
Non-mortgage ............. 2
--------------------
Total nonaccrual loans $348
====================
</TABLE>
The following table indicates the remaining principal balances of loans
classified as troubled debt restructurings, excluding loans subject to
FSLIC/RF loss coverage, as of the dates indicated:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) AT DECEMBER 31, 1993
--------------------
<S> <C>
Modified and restructured loans:
Real estate:
5+ unit residential ........... $ 255
Commercial and other .......... 111
Construction .................. 14
1-4 unit residential .......... 15
--------------------
Total restructured loans ... $ 395
====================
</TABLE>
At December 31, 1993, there were no commitments to lend additional funds
to borrowers whose loans were on nonaccrual or were restructured.
The following table reflects the amount of nonaccrual, past due and
troubled debt restructured loans including the interest income recognized and
total interest income that would have been recognized had the borrowers
performed under the original terms of the loans.
<TABLE>
<CAPTION>
DECEMBER 31, 1993
------------------------------------------
TOTAL INTEREST
INTEREST INCOME INCOME IF
(DOLLARS IN MILLIONS) BALANCE RECOGNIZED PERFORMING
--------- --------------- --------------
<S> <C> <C> <C>
Troubled debt restructured loans ..................... $395 $33 $36
Nonaccrual loans ..................................... 348 7 26
Accruing loans contractually past due 91 days or more -- -- --
--------- --------------- --------------
$743 $40 $62
========= =============== ==============
</TABLE>
F-66
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--LOANS RECEIVABLE (Continued)
The following table summarizes real estate loans net of undisbursed loan
funds by collateral type, interest rate type and state concentration as of
December 31, 1993.
<TABLE>
<CAPTION>
TOTAL
(DOLLARS IN COMMERCIAL REAL
MILLIONS) 1-4 UNIT RESIDENTIAL 5+ UNIT RESIDENTIAL AND OTHER CONSTRUCTION ESTATE
-------------------- ------------------- ------------------- VARIABLE LOANS(2) % OF TOTAL
STATE VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED
- ------------------- ---------- -------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California ......... $3,151 $ 439 $ 932 $159 $1,336 $298 $ 3 $ 6,318 55%
New York ........... 538 119 194 210 47 49 -- 1,157 10
Florida ............ 138 67 50 72 75 37 -- 439 4
Illinois ........... 125 105 55 16 51 30 -- 382 3
Hawaii ............. 311 41 -- -- 4 -- -- 356 3
Ohio ............... 145 125 29 12 31 10 -- 352 3
New Jersey ......... 170 47 58 28 16 11 -- 330 3
Colorado ........... 35 155 2 3 -- -- -- 195 2
Texas .............. 68 57 3 40 1 5 -- 174 2
Nevada ............. 14 4 79 26 37 1 -- 161 1
Other states (1) .. 565 260 243 186 163 110 15 1,542 14
---------- -------- ---------- ------- ---------- ------- -------------- --------- ------------
Total .............. $5,260 $1,419 $1,645 $752 $1,761 $551 $ 18 $11,406 100%
========== ======== ========== ======= ========== ======= ============== ========= ============
</TABLE>
- ------------
(1) There are 40 states, of which no one state has real estate loans in
excess of 1.3% of the total.
(2) The table balances exclude accrued interest receivable, amounts
advanced to borrowers for taxes and insurance, discounts and premiums,
and loss reserves, and include $145 million of loans held for sale.
NOTE 6--LOANS AND INVESTMENT SECURITIES HELD FOR SALE
Assets held for sale at the lower of aggregate amortized cost or estimated
market value, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------------
AMORTIZED ESTIMATED
(DOLLARS IN THOUSANDS) COST MARKET VALUE
----------- --------------
<S> <C> <C>
1-4 unit residential real estate loans ............. $145,316 $145,316
Investment securities .............................. 10,000 10,000
Consumer loans ..................................... -- --
----------- --------------
Total loans and investment securities held for sale $155,316 $155,316
=========== ==============
</TABLE>
F-67
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--MORTGAGE BANKING OPERATIONS
Income from mortgage banking operations is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
(DOLLARS IN THOUSANDS) 1993 1992
---------- ----------
<S> <C> <C>
Net gains on loans and mortgage-backed securities
sales:
Cash gain (loss) ................................ $ (3,440) $ 3,720
Present value of retained yield on loans sold .. 12,978 14,325
Loan servicing fee revenue ....................... 47,306 59,189
Net amortization and write downs of: .............
Present value of retained yield on loans sold .. (30,036) (32,358)
Purchased servicing rights ...................... (12,013) (3,935)
---------- ----------
Income from mortgage banking operations,
net .......................................... $ 14,795 $ 40,941
========== ==========
</TABLE>
Details of certain other mortgage banking activities are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
-----------------
UNAMORTIZED BALANCES OF:
<S> <C>
Purchased servicing rights .................................... $ 5,052
Present value of excess servicing on loans sold ............... 45,701
Loans serviced for others ...................................... 7,903,767
Remaining balance of loans sold with limited recourse
provisions .................................................... 456,711
</TABLE>
The fair value of the purchased servicing rights and excess servicing on
loans sold was approximately $116 million at December 31, 1993. The cash flow
valuation model used to calculate this amount utilizes assumptions regarding
future net servicing income and current market discount rates. Future net
servicing income is based on many factors including independent investment
banker prepayment rate projections. At December 31, 1993, included in
non-interest bearing demand deposit accounts are approximately $229 million
of unremitted principal and interest due investors and funds held for payment
of taxes and insurance on investor-owned loans.
NOTE 8--ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
-----------------
<S> <C>
Investment securities .............. $ 2,184
Mortgage-backed securities ......... 12,738
Loans receivable ................... 69,913
-----------------
Total accrued interest receivable $84,835
=================
</TABLE>
F-68
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--PROPERTY ACQUIRED IN SETTLEMENT OF LOANS:
Property acquired in settlement of loans consists of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
-----------------
<S> <C>
Real estate
1-4 unit residential ............................... $ 65,712
5+ unit residential ................................ 13,186
Commercial and other ............................... --
Mobile homes and automobiles ........................ 433
-----------------
79,331
Less allowance for losses ........................... (15,480)
-----------------
Total property acquired in settlement of loans, net $ 63,851
=================
</TABLE>
The above balance in 5+ unit residential real estate represents an amount
for which, upon consummation of the purchase by First Madison of the Acquired
Business, FNFC has partially guaranteed First Madison collection of such
balance.
NOTE 10--LOSS RESERVES
Analysis of the allowance for losses on loans, investment real estate and
foreclosed property is as follows:
<TABLE>
<CAPTION>
LOANS
----------------------------------------
CONSUMER
(DOLLARS IN THOUSANDS) REAL ESTATE AND OTHER COMMERCIAL
------------- ----------- ------------
<S> <C> <C> <C>
Balance--December 31, 1991 . $ 361,728 $ 10,317 $ 7,173
Additions charged to expense 78,552 2,725 3,951
Charge-offs ................. (131,469) (4,682) (6,240)
Recoveries .................. 2,372 1,159 740
------------- ----------- ------------
Balance--December 31, 1992 . 311,183 9,519 5,624
Additions charged to expense 78,550 2,946 10
Charge-offs ................. (153,637) (5,150) (5,011)
Recoveries .................. 12,023 808 377
------------- ----------- ------------
Balance--December 31, 1993 $ 248,119 $ 8,123 $ 1,000
============= =========== ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
INVESTMENT FORECLOSED
(DOLLARS IN THOUSANDS) TOTAL REAL ESTATE PROPERTY TOTAL
- ---------------------- ----- ----------- -------- -----
<S> <C> <C> <C> <C>
Balance--December 31, 1991 . $ 379,218 $ 10,608 $ 71,513 $ 461,339
Additions charged to expense 85,228 2,120 80,654 168,002
Charge-offs ................. (142,391) (9,922) (116,801) (269,114)
Recoveries .................. 4,271 5 18,835 23,111
----------- ------------- ------------ -----------
Balance--December 31, 1992 . 326,326 2,811 54,201 383,338
Additions charged to expense 81,506 2,690 45,110 129,306
Charge-offs ................. (163,798) -- (94,922) (258,720)
Recoveries .................. 13,208 772 11,091 25,071
----------- ------------- ------------ -----------
Balance--December 31, 1993 $ 257,242 $ 6,273 $ 15,480 $ 278,995
=========== ============= ============ ===========
</TABLE>
On December 30, 1993, Old FNB entered into an agreement with GMD, pursuant
to which Old FNB would sell to GMD approximately $500 million in
non-performing and/or classified commercial and multi-family real estate
loans at Old FNB's gross book value, over a period not exceeding
approximately three years. The obligations of GMD under this arrangement are
guaranteed by Ford Motor Company.
Generally, under this agreement, Old FNB will sell to GMD, on a quarterly
basis, all non-performing commercial and multi-family real estate loans, up
to the aggregate $500 million limit. If that limit is not reached by the end
of the three year term, the remaining portion of the $500 million commitment
will be satisfied by Old FNB selling to GMD performing classified commercial
and multi-family real estate loans. The assets that may be sold under this
agreement are limited to commercial and multi-family real estate loans held
by Old FNB as of November 30, 1993. $17 million of such loans were sold to
GMD in the first quarter of 1994.
F-69
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--OFFICE PREMISES AND EQUIPMENT
The components of office premises and equipment are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
-----------------
<S> <C>
Land ...................................... $ 21,425
Buildings and leasehold improvements ..... 91,629
Furniture and equipment ................... 146,335
Capitalized equipment leases .............. 1,310
Construction in progress .................. 2,891
-----------------
263,590
Accumulated depreciation and amortization (154,879)
-----------------
Total office premises and equipment, net $ 108,711
=================
</TABLE>
The estimated cost to complete projects included in construction in
progress was $4 million at December 31, 1993. Depreciation and amortization
expense on office premises and equipment for the years ended December 31,
1993 and 1992 was $25 million and $36 million, respectively.
The Acquired Business and its subsidiaries rent premises under long-term,
noncancelable operating leases expiring at various dates through 2064. Rental
expense for the years ended December 31, 1993 and 1992 was $23 million and
$27 million, respectively. Rental income from subleasing agreements was $5
million in each of the years ended December 31, 1993 and 1992. At December
31, 1993, minimum rental commitments, net of sublease agreements, under all
noncancelable operating leases were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
YEAR ENDED THOUSANDS)
- ------------------- --------------------
<S> <C>
1994 ............... $14,834
1995 ............... 12,058
1996 ............... 10,541
1997 ............... 9,872
1998 ............... 8,744
1999 and thereafter 26,025
--------------------
Total ............ $82,074
====================
</TABLE>
At December 31, 1993, future minimum lease payments under all capital
leases together with the present value of the minimum lease payments were as
follows:
<TABLE>
<CAPTION>
(DOLLARS IN
YEAR ENDED THOUSANDS)
- ------------------------------------- --------------------
<S> <C>
1994 ................................. $ 937
1995 ................................. 894
1996 ................................. 894
1997 ................................. 223
--------------------
Total minimum lease payments ......... 2,948
Less interest portion ................ (1,777)
--------------------
Total capitalized lease obligations $ 1,171
====================
</TABLE>
F-70
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--CUSTOMER DEPOSITS
A summary of deposit accounts by category is presented below:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
----------------------------
AVERAGE RATE BALANCE
-------------- ------------
<S> <C> <C>
TYPE OF ACCOUNT
Passbook accounts ............... 2.14% $ 838,922
NOW accounts:
Interest bearing ............... 1.04 761,433
Non-interest bearing ........... -- 788,309
Money market deposit accounts .. 2.51 2,786,381
Term accounts:
3.0% or less .................. 2.78 1,078,875
3.01- 4.00%.................... 3.45 1,739,313
4.01- 5.00 .................... 4.63 506,427
5.01- 6.00 .................... 5.31 261,512
6.01- 7.00 .................... 6.57 258,522
7.01- 8.00 .................... 7.51 524,059
8.01- 9.00 .................... 8.47 525,305
9.01-10.00 .................... 9.34 283,160
10.01-11.00 .................... 10.64 13,358
11.01-12.00 .................... 11.36 89,455
12.01-13.00 .................... 12.28 91,452
13.01-14.00 .................... 13.43 188
------------
10,546,671
Accrued interest payable ........ 12,479
Purchase accounting adjustments 2,470
------------
Total customer deposits ...... $10,561,620
============
</TABLE>
The weighted average stated interest rates on deposits at December 31,
1993 was 3.54%. Brokered certificates of deposits included above totalled
$230 million at December 31, 1993. Deposit month-end balances averaged $12.1
billion during 1993 with a weighted average rate of interest of 4.00%. At
December 31, 1993, deposit liabilities include $283 million of deposits from
affiliated companies and entities. At December 31, 1993, the Acquired
Business had committed to sell customer deposits held in two branches
totalling approximately $35 million.
The fair value of customer deposits at December 31, 1993 is $10.6 billion.
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair
value of fixed maturity term accounts is estimated using the interest rates
currently offered for deposits of similar remaining maturities.
F-71
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--CUSTOMER DEPOSITS (Continued)
A summary of deposit interest expense by category is presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
(DOLLARS IN THOUSANDS) 1993 1992
---------- ---------
<S> <C> <C>
TYPE OF ACCOUNT
Passbook accounts ........................ $ 32,493 $ 28,856
NOW accounts ............................. 11,584 25,154
Money market deposit accounts ............ 78,149 141,917
Term accounts ............................ 361,331 561,124
---------- ---------
483,557 757,051
Interest forfeitures ..................... (1,126) (1,571)
---------- ---------
Total customer deposit interest expense $482,431 $755,480
========== =========
</TABLE>
At December 31, 1993, term accounts have scheduled maturities as follows:
<TABLE>
<CAPTION>
TERM ACCOUNTS
MATURING WITH
(DOLLARS IN THOUSANDS) BALANCES
------------------------
MATURITY TOTAL WEIGHTED
DURING THE YEAR ENDING OVER $100,000 AND BALANCES AVERAGE
DECEMBER 31, $100,000 UNDER MATURING RATE
- ---------------------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
1994 .................. $360,710 $3,458,494 $3,819,204 4.36%
1995 .................. 84,698 494,553 579,251 7.42
1996 .................. 66,343 528,031 594,374 7.55
1997 .................. 17,181 196,622 213,803 6.21
1998 .................. 11,184 133,780 144,964 5.60
1999 and thereafter .. 5,859 14,171 20,030 9.53
---------- ------------ ------------
$545,975 $4,825,651 $5,371,626 5.17%
========== ============ ============ ==========
</TABLE>
NOTE 13--SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are summarized as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
-----------------
<S> <C>
Mortgage-backed securities:
Maturing within 30 days ............................... $554,057
Maturing 30-90 days ................................... 236,291
Maturing 90 days to 1 year ............................ 30,500
Maturing 1-2 years .................................... 13,051
Accrued interest payable .............................. 1,442
-----------------
Total securities sold under agreements to repurchase $835,341
=================
</TABLE>
At December 31, 1993, these agreements had a weighted average interest
rate of 3.73%. The market value of these agreements at December 31, 1993 was
$836 million. The underlying securities were delivered to, and are being held
by securities dealers. These dealers may have loaned the securities to other
parties in the normal course of their operations, but all agreements require
the dealers to resell to the Acquired Business the identical securities at
the maturities of the agreements. Securities sold under agreements to
repurchase averaged $309 million during 1993 and the maximum amount
outstanding at any month-end was $983 million for 1993.
F-72
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Continued)
At December 31, 1993 the amortized cost of the mortgage-backed securities
subject to the terms of the reverse repurchase agreements was $855 million.
The market value of these securities at December 31, 1993 was $907 million.
The following is a summary by dealer of securities sold under agreements
to repurchase, excluding accrued interest, at December 31, 1993:
<TABLE>
<CAPTION>
(DOLLARS IN WEIGHTED AVERAGE
THOUSANDS) AMOUNT DUE MATURITY (DAYS)
------------ ----------------
<S> <C> <C>
First Boston ........ $250,035 27
Goldman Sachs ....... 205,877 8
Merrill Lynch ....... 98,145 10
Morgan Stanley ...... 279,842 125
------------ ----------------
Total ............. $833,899 53
============ ================
</TABLE>
NOTE 14--OTHER BORROWINGS
Other borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
----------------------------
(DOLLARS IN THOUSANDS) BALANCE AVERAGE RATE
------------ --------------
<S> <C> <C>
Fixed rate borrowings from the FHLB $2,350,110 8.52%
Subordinated debentures:
10.00%, due October, 2006 .......... 92,100 10.00
Multi-family housing revenue bonds 20,099 3.79
Capitalized lease obligations ..... 1,171 15.77
Other borrowings ................... 5,665 8.14
------------ --------------
2,469,145 8.54%
Accrued interest payable ............ 19,024
Net discount ........................ (10,554)
------------ --------------
Total long-term borrowings .......... $2,477,615
============
</TABLE>
Maturities of other borrowings at December 31, 1993 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITIES DURING THE BALANCES MATURING AVERAGE RATES
------------------------ ----------------
YEARS ENDING DECEMBER 31 FHLB OTHER FHLB OTHER
- ------------------------ ------------ ---------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1994 .................... $ 680,787 $ 1,258 9.60% 6.63%
1995 .................... 485,710 81 8.74 8.20
1996 .................... 865,968 321 7.30 8.38
1997 .................... 215,000 8,325 8.92 13.49
1998 .................... 100,000 -- 9.85 --
1999 and thereafter .... 2,645 109,050 7.71 8.96
------------ ---------- ------- -------
Total ................. $2,350,110 $119,035 8.52% 9.25%
============ ========== ======= =======
</TABLE>
Short-term borrowings averaged $12 million during 1993, with a weighted
average rate of 3.09%. There were no outstanding short-term borrowings as of
December 31, 1993. Long-term borrowings averaged $2.7 billion during 1993
with a weighted average rate, adjusted for interest income recognized
F-73
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--OTHER BORROWINGS (Continued)
on interest rate exchange agreements, of 5.59%. Included in discounts at
December 31, 1993 are deferred gains on sale of interest rate exchange
agreements totalling $4 million.
At December 31, 1993, advances from Federal Home Loan Banks and other
borrowings had a fair value of approximately $2.6 billion. Fair value of
borrowings is estimated using rates currently offered for liabilities of
similar remaining maturities.
The following is a summary of the carrying value of real estate loans,
mortgage-backed securities, investment securities, and FHLB stock pledged as
collateral for FHLB borrowings:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
-----------------
<S> <C>
Real estate loans .......... $4,643,239
Mortgage-backed securities 1,008,222
FHLB stock ................. 152,629
-----------------
Total .................. $5,804,090
=================
</TABLE>
NOTE 15--INTEREST RATE EXCHANGE AGREEMENTS
Interest rate exchange agreements outstanding at December 31, 1993 are as
follows:
<TABLE>
<CAPTION>
NOTIONAL YEAR END INTEREST
(DOLLARS IN THOUSANDS) PRINCIPAL RATE
MATURITY DATE AMOUNT PAID RECEIVED VARIABLE RATE INDEX
- ----------------------------- ----------- ------- --------- ---------------------
<S> <C> <C> <C> <C>
Paid Variable/Received Fixed:
April 1994 .................. $500,000 3.38% 7.73% 3 Month LIBOR
April 1995 .................. 500,000 3.38 7.97 3 Month LIBOR
April 1996 .................. 500,000 3.38 8.19 3 Month LIBOR
September 1996 .............. 250,000 3.33 4.19 1 Month LIBOR
April 1998 .................. 400,000 3.38 8.38 3 Month LIBOR
</TABLE>
As of December 31, 1993, interest rate exchange agreements totalling $1.35
billion of notional principal are collateralized by a $30 million third party
letter of credit issued. If terminated at December 31, 1993, the interest
rate exchange agreements would generate a pre-tax gain of approximately $133
million. There were no interest rate cap, collar and floor agreements
outstanding at December 31, 1993.
The net decrease in interest expense on customer deposits and borrowings
from interest rate exchange agreements is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
(DOLLARS IN THOUSANDS) 1993 1992
--------- ---------
<S> <C> <C>
Interest rate exchanges ................. $87,369 $76,280
Amortization of deferred gains and fees 1,985 2,934
Interest rate caps, collars and floors . -- (750)
--------- ---------
$89,354 $78,464
========= =========
</TABLE>
F-74
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--INTEREST RATE EXCHANGE AGREEMENTS (Continued)
Below is a roll forward of deferred gains associated with interest rate
swaps. These gains resulted from the termination of interest rate swaps in
1990 and are being amortized over the original life of the swap terminated.
<TABLE>
<CAPTION>
<S> <C>
Balance as of December 31, 1991 $ 8,740
Amortization .................... 2,934
---------
Balance as of December 31, 1992 5,806
Amortization .................... 1,985
---------
Balance as of December 31, 1993 $ 3,821
=========
</TABLE>
NOTE 16 -- FEDERAL AND STATE TAXES ON INCOME
The components for the provision (recovery) for federal and state income
taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
(DOLLARS IN THOUSANDS) 1993 1992(*)
---------- -----------
<S> <C> <C>
Federal and state tax expense (benefit):
Current:
Federal ............................. $ 46,730 $ 21,296
State ............................... 7,834 2,000
---------- -----------
54,564 23,296
Deferred: .............................
Federal ............................. (14,156) (50,747)
State ............................... -- --
(14,156) (50,747)
---------- -----------
Expense (benefit) for the period . $ 40,408 $ (27,451)
========== ===========
</TABLE>
(*)Excludes cumulative effect of changes in accounting principles.
The Acquired Business adopted Statement of Financial Accounting Standards
No. 109 ("SFAS No. 109"), "Accounting for Income Taxes," as of January 1,
1992. The cumulative effect of this change in accounting principle increased
1992 net income by $13 million. Financial statements for prior years were not
restated to apply the provisions of SFAS No.109. The adoption of SFAS No. 109
changes the method of accounting for income taxes from the deferred method
using Accounting Principles Board Opinion No. 11 ("APB No. 11") to an asset
and liability approach.
F-75
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16 -- FEDERAL AND STATE TAXES ON INCOME (Continued)
Under SFAS No. 109, deferred income taxes reflect the estimated tax effect
of temporary differences between the amount of assets and liabilities for
financial reporting purposes and those amounts as measured by tax laws and
regulations. These temporary differences include purchase accounting
valuation adjustments and other items not previously included in the
determination of deferred income taxes under APB No. 11. Accordingly, certain
purchase accounting valuation adjustments and related amortization have been
modified as a result of the adoption of SFAS No. 109. The impact from the
adoption of SFAS No. 109 as it relates to purchase accounting valuation
adjustments was to increase pre-tax income by $14 million and increase income
tax expense by $14 million for the year ended December 31, 1992.
The components of deferred income tax assets and liabilities as of
December 31, 1993 are as follows:
<TABLE>
<CAPTION>
1993 DEFERRED TAX
---------------------------
(DOLLARS IN MILLIONS) ASSETS LIABILITIES
---------- ---------------
<S> <C> <C>
Loss reserves .......................... $ 76 --
Deferred intercompany transactions .... 47 --
Purchase accounting .................... 23 --
Deferred loan servicing ................ -- $(16)
Deferred loan fees ..................... -- (11)
Employee benefit plans ................. 2 --
All other .............................. 15 (38)
---------- ---------------
163 (65)
Valuation allowances ................... (16) --
---------- ---------------
Total ................................ $147 $(65)
========== ===============
</TABLE>
The valuation allowances established relate primarily to state deferred
tax assets. The Acquired Business' net deferred federal tax assets, including
alternative minimum taxes, are expected to be realized in the consolidated
income tax return, in accordance with the terms of its tax sharing agreement.
A reconciliation of statutory tax rates to effective tax rates is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
(DOLLARS IN MILLIONS) 1993 1992
---------------- -----------------
<S> <C> <C> <C> <C>
Tax at statutory federal rate .................... $ 66 35.0% $ 37 34.0%
Effect of:
Payments from the FSLIC/RF ...................... (25) (12.8) (75) (69.6)
Municipal bond interest ......................... (1) (0.5) (1) (0.9)
Amortization of purchase accounting adjustments,
goodwill and intangible assets ................. 6 3.2 6 5.5
Qualifying loan loss reserve liquidation ........ 8 4.3 -- --
Change in tax rate .............................. (5) (2.7) -- --
Other, net ..................................... (14) (7.5) 5 4.6
------ -------- ------- --------
35 19.0 (28) (26.4)
State tax, net of federal income tax effect ..... 5 2.7 1 0.9
------ -------- ------- --------
Income tax expense (recovery) .................... $ 40 21.7% $(27) (25.5)%
====== ======== ======= ========
</TABLE>
During 1993, the Acquired Business recognized $8 million of federal income
tax charges resulting from the partial liquidation of its qualifying loan
loss reserves for which deferred income taxes have not
F-76
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16 -- FEDERAL AND STATE TAXES ON INCOME (Continued)
previously been provided. The liquidation of the qualifying loan loss
reserves resulted from a decline in the balance of qualifying loans and real
estate owned. Included in retained earnings at December 31, 1993 is $187
million which represents the accumulation of qualifying loan loss reserve
deductions and supplemental reserve deductions for which no provision for
federal income taxes has been made. If in the future these amounts are used
for any purpose other than to absorb losses on bad debts, or if further
reductions in qualifying loans and real estate owned occur, a tax liability
will be imposed on Old FNB for these amounts at the then-current tax rates.
NOTE 17--REGULATION
The OTS has established capital regulations requiring all savings
institutions to maintain: (a) tangible capital equal to 1.5% of adjusted
total assets, as defined; (b) core capital equal to 3.0% of adjusted total
assets, as defined; and (c) risk-based capital, equal to 8.0% on December 31,
1993, of risk-weighted assets, as defined.
The following table sets forth the regulatory capital positions as
reported to the OTS by Old FNB at December 31, 1993:
<TABLE>
<CAPTION>
REGULATORY CAPITAL (UNAUDITED)
------------------------------------
CORE
TANGIBLE (LEVERAGE) RISK-BASED
---------- ---------- ------------
<S> <C> <C> <C>
Regulatory capital ratios, as filed with the OTS 6.3% 6.5% 11.1%
========== ========== ============
</TABLE>
The above ratios were calculated using amounts reported to the OTS prior
to the preparation of the Acquired Business' financial statements. The new
management of the Acquired Business intends to continue to comply with all
required capital ratios.
The FDIC Improvement Act of 1992 ("FDICIA") requires each federal banking
agency to implement prompt corrective actions for institutions that it
regulates. In response to this requirement, the OTS adopted final rules,
effective December 19, 1993, based upon FDICIA's five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under FDICIA, the OTS is
required to take supervisory action against institutions that are not deemed
either "well capitalized" or "adequately capitalized." The rules generally
provide that a savings association is "well capitalized" if its total
risk-based capital ratio is 10% or greater, its ratio of core capital to
risk-based assets is 6% or greater, its core capital (leverage) ratio is 5%
or greater, and the institution is not subject to a capital directive.
NOTE 18--EMPLOYEE BENEFIT PLANS
Retirement Plans:
The FNFC Retirement Plan ("Plan") is the primary retirement plan covering
the employees of FNFC, the Acquired Business and their subsidiaries. The Plan
covers substantially all permanent employees who have completed one year of
service. In addition, an unfunded, nonqualified, discretionary plan is
maintained to provide supplemental retirement benefits to certain present and
former senior officers.
During 1991, the Plan benefit formula was modified retroactively to an
effective date of July 1, 1989. Under the Plan's previous benefit formulas,
participants accrued a monthly benefit amount under a defined benefit
formula. Upon revision of the Plan's benefit formulas, the monthly benefit
amount was converted to a lump-sum equivalent value representing the
participant's beginning account balance under the amended plan. Thereafter,
4% of the participant's quarterly eligible compensation is allocated to each
F-77
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--EMPLOYEE BENEFIT PLANS (Continued)
participant's account. Plan net earnings are allocated based on the
participant's account balance. The periodic pension expense for 1993 and 1992
has been calculated using the revised benefit formula and reflects all
adjustments necessary to adopt the provisions of the new Plan.
The Acquired Business' funding policy is to contribute amounts sufficient
to meet funding requirements set forth in U.S. employee benefit and tax laws
plus such additional amounts as the Acquired Business may determine to be
appropriate. A contribution of $0.1 million was made in 1992. No
contributions were required in 1993. All assets are invested with the Ford
Retirement Plan Master Trust. Master Trust assets are principally U.S.
Government and Agency obligations, corporate bonds and notes, and common
stocks.
The Plan was previously qualified under 401(a) of the Internal Revenue
Code. The Plan intends to file an application with the IRS for a
determination that the Plan, as amended, satisfies the qualification
requirements of Section 401(a) and related provisions of the Internal Revenue
Code of 1986, as amended. The Plan intends to file the determination letter
application before the required filing due date and to make all such
amendments to the Plan as may be necessary or appropriate to ensure that it
will obtain a favorable determination letter. Pension costs include the
following components:
<TABLE>
<CAPTION>
ENDED DECEMBER 31,
--------------------
(DOLLARS IN THOUSANDS) 1993 1992
--------- ---------
<S> <C> <C>
Benefits credited for service during the year $ 2,099 $ 1,565
Interest cost on projected benefit obligation 2,567 2,690
Actual return on assets ....................... (4,134) (4,470)
Net amortization and deferral ................. (782) (782)
Curtailment (loss) gain ....................... (587) (1,137)
--------- ---------
Net periodic pension cost (credit) ............ $ (837) $(2,134)
========= =========
</TABLE>
Net periodic pension costs at December 31, 1993 and 1992 were computed
using a weighted average discount rate of 8.0%, 8.5% and an expected rate of
return on plan assets of 9.5% for 1993 and 1992.
The projected benefit obligations at December 31, 1993 were determined
using a discount rate of 8%.
F-78
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--EMPLOYEE BENEFIT PLANS (Continued)
The status of the retirement plans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
--------------------------------
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS EXCEED
(DOLLARS IN THOUSANDS) BENEFITS ASSETS
--------------- ---------------
<S> <C> <C>
Present value of accumulated retirement benefits:
Vested .......................................... $(34,542) $(2,258)
Non-vested ...................................... (2,320) (53)
--------------- ---------------
Accumulated benefits obligation .................. $(36,862) $(2,311)
=============== ===============
Projected benefit obligation ..................... $(36,862) $(2,311)
Plan assets at fair value ........................ 48,500 --
--------------- ---------------
Projected benefit obligation less than
(in excess of) Plan assets ...................... 11,638 (2,311)
Unrecognized net (asset) obligation at
January 1, 1987 (date of adoption) .............. (4,582) 153
Unamortized amendments ........................... (3,475) 760
Unrecognized net amount resulting from
Plan investment experience ...................... (9,592) (913)
--------------- ---------------
Total accrued pension cost ..................... $ (6,011) $ (2,311)
=============== ===============
</TABLE>
Since the plan will not be retained by First Madison upon completion of
its acquisition of the Acquired Business, any plan over funding amount will
remain with FNFC.
Postretirement Benefits Plan:
FNB and certain of its subsidiaries sponsor unfunded plans to provide
medical, dental and vision benefits to certain eligible employees and their
dependents from the date of early retirement to a maximum age of 65. In
general, early retirement is age 55 with 10 years of service. Certain
retirees contribute nothing for their coverage; however, all new retirees
participating in the Plan contribute a portion of the premiums until age 65.
The estimated cost for postretirement health care benefits has been
accrued on an actuarially- determined basis, in accordance with the
requirements of Statement of Financial Accounting Standards No. 106, ("SFAS
No. 106"), "Employers' Accounting for Postretirement Benefits Other Than
Pensions". In 1992, Old FNB elected to recognize immediately the full amount
of the accumulated postretirement benefit obligation of this accounting
change, resulting in an adverse effect on income of $3 million in the first
quarter of 1992. The change reflected an unaccrued retiree benefit obligation
liability of approximately $4 million, partially offset by projected tax
benefits of $1 million.
The status of the postretirement plan is as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
-----------------
<S> <C>
Accumulated postretirement benefit obligation:
Retirees ..................................... $2,202
Active employees eligible to retire ........... 1,818
Other active employees ........................ 1,754
-----------------
Total accrued benefit liability .............. $5,774
=================
</TABLE>
F-79
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--EMPLOYEE BENEFIT PLANS (Continued)
The projected benefit obligation at December 31, 1993 was determined
using a discount rate of 7.5%. An increase of 1% in the health care cost
trend rate would cause service and interest costs and the accumulated
postretirement benefit obligation to increase by less than $2 million.
Postretirement benefits costs for the years ended December 31, 1993 and
1992 include the following components:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
--------------
(DOLLARS IN THOUSANDS) 1993 1992
------ ------
<S> <C> <C>
Current service cost ................ $288 $249
Interest cost on benefit obligation 389 360
------ ------
Net periodic benefit cost ........... $677 $609
====== ======
</TABLE>
Net periodic benefit cost at December 31, 1993 was computed using a
weighted average discount rate of 7.5%. The initial health care cost trend
rate used was 11.5%, the average trend rate used was 8.7% and the ultimate
trend rate used was 5.5%, with the ultimate rate being achieved in 10 years.
Investment Plan:
At December 31, 1993, FNFC, the Acquired Business and substantially all of
their subsidiaries had a defined contribution plan that is a qualified plan
under Section 401(k) of the Internal Revenue Code ("401(k) Plan"). The 401(k)
Plan has received a favorable determination letter from the IRS. The 401(k)
Plan is available to substantially all employees with at least one year of
employment. Employee contributions are voluntary. Effective January 1, 1993,
the 401(k) Plan has been amended to provide for deferrals of up to twelve
percent of qualifying compensation with a corresponding dollar for dollar
matched employer contribution of the first four percent of eligible employee
contributions. Employees vest immediately in their own contributions, and
vest in the Acquired Business' contributions based on years of service. For
the years ended December 31, 1993 and 1992, the Acquired Business' pre-tax
401(k) Plan contributions were $3 million and $3 million, respectively.
NOTE 19--COMMITMENTS AND CONTINGENCIES
Lending and Investment Commitments:
Outstanding written commitments relating to loans, mortgage-backed
securities and investment securities are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
-----------------
<S> <C>
Commitments to originate loans:
Variable rate ................................................. $123,725
Fixed rate .................................................... 148,983
Unused lines of credit provided to consumers .................. 327,671
Commitments to purchase loans and mortgage-backed securities:
Variable rate ................................................. --
Fixed rate .................................................... 8,912
Forward commitments to sell loans and mortgage-backed
securities .................................................... 280,187
</TABLE>
Letters of Credit Commitments:
Through year-end 1985, FNBMC entered into partnership agreements with
developers to acquire and develop multi-family rental projects. The projects
are partially funded through tax-exempt mortgage
F-80
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--COMMITMENTS AND CONTINGENCIES (Continued)
revenue bond programs. Commencing in 1984, the Acquired Business began
issuing its letters of credit to guarantee the payment of principal and
interest on bonds issued by various housing authorities, and concurrently
originated and serviced the mortgage loans made by the bond issuers. Should
the Acquired Business be obligated under its letter of credit to redeem the
bonds because of default of a project, the bond trustee is required to assign
the mortgage loan to the Acquired Business. At December 31, 1993, the
Acquired Business had a total of $375 million of such letters of credit
outstanding with remaining terms of 2 to 26 years. Given the uncertainty of
the interaction of these letters of credit with the underlying mortgage loans
and cash flows of collateral properties under future economic conditions, it
is not practicable to estimate the fair value of these letters of credit.
Litigation:
The Acquired Business and its subsidiaries are involved in litigation and
may be subject to claims arising from its operations. The Acquired Business
does not believe that the outcome of these actions, individually or in the
aggregate, will have a material adverse effect on the consolidated financial
position of the Acquired Business.
NOTE 20 -- SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Interest and Income Taxes Paid:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
(DOLLARS IN THOUSANDS) 1993 1992
---------- ------------
<S> <C> <C>
Interest paid ....... $612,397 $1,008,821
Income taxes paid .. 1,956 2,413
Income tax refunds . 17,708 114,573
</TABLE>
Non-Cash Investing and Financing Activities:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
(DOLLARS IN THOUSANDS) 1993 1992
---------- ----------
<S> <C> <C>
Additions to property
acquired in settlement
of loans ............. $135,251 $226,320
Loans securitized
into mortgage-backed
securities ........... -- 17,827
</TABLE>
F-81
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders of SFFed Corp.
We have audited the accompanying consolidated statements of financial
condition of SFFed Corp. and subsidiaries ("SFFed") as of December 31, 1995
and 1994, and the related consolidated statements of operations,
stockholders' equity and cash flows, for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of SFFed's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of SFFed Corp. and subsidiaries
at December 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995
in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements on
February 1, 1996, SFFed was acquired by and merged into First Nationwide
Bank, A Federal Savings Bank.
Deloitte & Touche LLP
San Francisco, California
April 15, 1996
F-82
<PAGE>
SFFED CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents (Note 3):
Cash on hand and amounts due from depository institutions ...... $ 26,251 $ 18,306
Federal funds sold .............................................. 4,000 34,900
Securities purchased under agreements to resell ................. 165,000 112,000
------------ ------------
195,251 165,206
Mortgage-backed securities available for sale, at market (Note 4) 72,844 77,458
Mortgage-backed securities held for investment, net (approximate
market value of 1995: $872,475; and 1994: $323,257) (Note 4) ... 859,554 330,578
Loans held for sale, net (Note 6) ................................ 4,393 3,627
Loans receivable held for investment, net (Note 5) ............... 2,714,988 3,011,504
Accrued interest receivable (Notes 4 and 5) ...................... 23,600 18,798
Federal Home Loan Bank stock, at cost (Note 3) ................... 31,579 30,049
Premises and equipment, net (Note 7) ............................. 21,899 22,946
Real estate owned, net (Note 8) .................................. 32,404 25,784
Other assets ..................................................... 26,923 23,986
Excess of cost over fair value of net assets acquired (net of
accumulated amortization of 1995: $8,967; and 1994: $8,298) .... 8,053 8,722
------------ ------------
$3,991,488 $3,718,658
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Customer deposits (Note 9) ....................................... $2,693,243 $2,481,988
Federal funds purchased .......................................... 4,000 35,000
Securities sold under agreements to repurchase (Note 10) ........ 713,362 347,679
Advances from Federal Home Loan Bank of San Francisco (Note 10) . 274,952 580,983
Senior notes (Note 10) ........................................... 49,245 49,158
Advance payments by borrowers for taxes and insurance ........... 2,138 3,425
Taxes on income (Note 11) ........................................ 3,671 602
Other liabilities and accrued expenses ........................... 54,186 23,636
Unearned income .................................................. 1,301 1,643
------------ ------------
3,796,098 3,524,114
------------ ------------
Commitments and contingencies (Note 17)
Stockholders' equity (Notes 4, 10, 11, 12, 14 and 15):
Serial preferred stock--par value $.01 per share; 4,000,000
shares authorized and unissued ............................... -- --
Common stock--par value $.01 per share; 20,000,000 shares
authorized; issued and outstanding--1995: 7,883,247 and 1994:
7,833,282 .................................................... 79 78
Additional paid-in capital ................................... 70,497 69,912
Retained earnings--substantially restricted .................. 126,270 128,512
Unrealized loss on securities available for sale, net of tax . (1,128) (3,449)
Minimum pension liability adjustment, net of tax ............. (328) (509)
------------ ------------
Total stockholders' equity .................................. 195,390 194,544
------------ ------------
Total ...................................................... $3,991,488 $3,718,658
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-83
<PAGE>
SFFED CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest on loans .......................................... $215,147 $189,984 $191,532
Interest on mortgage-backed securities ..................... 60,024 22,729 21,963
Interest and dividends on investments and FHLB stock ...... 10,685 6,735 4,850
---------- ---------- ----------
Total ..................................................... 285,856 219,448 218,345
---------- ---------- ----------
Interest expense:
Interest on customer deposits (Note 9) ..................... 135,299 101,411 94,803
Interest on Federal Home Loan Bank advances ................ 23,958 24,915 28,303
Interest on senior notes ................................... 5,703 1,756 --
Interest on other borrowings ............................... 41,882 12,861 9,074
---------- ---------- ----------
Total ..................................................... 206,842 140,943 132,180
---------- ---------- ----------
Net interest income ........................................ 79,014 78,505 86,165
Provision for loan losses (Note 5) .......................... 11,094 17,205 6,583
---------- ---------- ----------
Net interest income after provision for loan losses ....... 67,920 61,300 79,582
---------- ---------- ----------
Noninterest income:
Mortgage banking activities (Note 6):
Gain (loss) on sale of real estate loans .................. (205) 491 4,898
Loan servicing income ..................................... 5,460 4,080 2,621
---------- ---------- ----------
Total ..................................................... 5,255 4,571 7,519
Loan, deposit and other fees ............................... 5,291 5,853 6,773
Income from real estate partnerships ....................... 267 79 953
Other income ............................................... 1,410 171 858
---------- ---------- ----------
Total ..................................................... 12,223 10,674 16,103
---------- ---------- ----------
Noninterest expense:
Compensation and benefits (Notes 2, 14 and 15) ............ 35,518 35,979 36,616
Occupancy and equipment (Note 17) .......................... 13,865 12,953 13,252
Advertising and promotion .................................. 2,094 2,446 1,859
Outside data processing .................................... 4,540 4,065 3,849
Deposit insurance premiums and regulatory assessments ..... 6,811 6,178 5,867
Provision for losses on real estate owned and other
(Note 5) .................................................. 4,874 8,524 7,067
Real estate owned operations, net .......................... 2,138 5,897 6,353
Deferred loan origination costs ............................ (4,497) (7,016) (8,077)
Amortization of excess of cost over fair value of net
assets acquired ........................................... 669 708 709
Other expense (Note 2) ..................................... 12,763 10,368 10,391
---------- ---------- ----------
Total ..................................................... 78,775 80,102 77,886
---------- ---------- ----------
Income (loss) before income taxes .......................... 1,368 (8,128) 17,799
Income tax expense (benefit) (Note 11) ...................... 1,568 (3,400) 7,905
---------- ---------- ----------
Net income (loss) ........................................... $ (200) $ (4,728) $ 9,894
========== ========== ==========
Earnings (loss) per share (Note 1) .......................... $ (0.03) $ (0.60) $ 1.24
========== ========== ==========
Dividends per share ......................................... $ 0.26 $ 0.28 $ 0.15
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-84
<PAGE>
SFFED CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
--------------------------------------------------------------------------------
UNREALIZED
RETAINED LOSS ON MINIMUM
EARNINGS SECURITIES PENSION
SUBSTANTIALLY AVAILABLE LIABILITY
ADDITIONAL RESTRICTED FOR SALE, ADJUSTMENT,
COMMON PAID-IN (NOTES 11, 12 NET OF TAX NET OF TAX
STOCK CAPITAL AND 15) (NOTE 4) (NOTE 14) TOTAL
-------- ------------ --------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1992 $77 $68,824 $126,704 $195,605
Stock option and
restricted stock
activity ............... 1 568 569
Cash dividends ........... (1,166) (1,166)
Unrealized gain on
securities available for
sale, net of tax ....... $ 3,149 3,149
Net income ............... 9,894 9,894
-------- ------------ --------------- ------------ ------------- ----------
Balances, December 31, 1993 78 69,392 135,432 3,149 208,051
Stock option and
restricted stock
activity ............... 520 520
Cash dividends ........... (2,192) (2,192)
Net change in unrealized
loss on securities
available for sale, net
of tax ................. (6,598) (6,598)
Minimum pension liability
adjustment, net of tax . $(509) (509)
Net loss ................. (4,728) (4,728)
-------- ------------ --------------- ------------ ------------- ----------
Balances, December 31, 1994 78 69,912 128,512 (3,449) (509) 194,544
Stock option and
restricted stock
activity ............... 1 585 586
Cash dividends ........... (2,042) (2,042)
Net change in unrealized
loss on securities
available for sale, net
of tax ................. 2,321 2,321
Net change in minimum
pension liability
adjustment, net of tax . 181 181
Net loss ................. (200) (200)
-------- ------------ --------------- ------------ ------------- ----------
Balances, December 31, 1995 $79 $70,497 $126,270 $(1,128) $(328) $195,390
======== ============ =============== ============ ============= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-85
<PAGE>
SFFED CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................. $ (200) $ (4,728) $ 9,894
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of premises and equipment ..... 3,206 3,226 3,043
Amortization of excess of cost over fair value of net assets
acquired .................................................... 669 708 709
Provision for losses, net .................................... 15,968 25,729 13,650
Change in deferred income taxes .............................. 4,195 (2,660) (5,050)
Increase in interest payable ................................. 16,872 5,356 1,293
Increase in interest receivable .............................. (4,802) (1,996) (142)
Dividend income on FHLB stock ................................ (1,530) (1,322) (737)
(Gain) loss on sale of real estate loans, net ................ 205 (491) (4,898)
Amortization of deferred loan fees ........................... (1,778) (2,667) (3,271)
Proceeds from sales of loans originated for sale ............ 46,623 130,824 434,242
Originations of loans held for sale .......................... (58,402) (153,709) (472,847)
Net change in other assets/liabilities ....................... 8,587 (21,137) 2,226
Increase (decrease) in income taxes payable .................. (1,126) (1,040) 4,476
----------- ----------- -----------
Net cash provided by (used in) operating activities .......... 28,487 (23,907) (17,412)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal payments received on mortgage-backed securities
available for sale ........................................... 8,467 37,233 --
Principal payments received on mortgage-backed securities held
for investment ............................................... 73,668 31,669 77,610
Purchases of mortgage-backed securities held for investment .. (104,472) (4,074) (10,053)
Maturities of investment securities ........................... -- -- 13,270
Purchases of investment securities ............................ -- -- (6,040)
Principal payments received on loans .......................... 245,990 367,463 385,560
Originations of loans held for investment ..................... (469,761) (795,217) (693,488)
Loans purchased ............................................... (12,386) (1,307) (542)
Proceeds from redemption of FHLB stock ........................ -- -- 2,103
Purchases of FHLB stock ....................................... -- (622) (1,118)
Sales of premises and equipment ............................... 214 43 92
Purchases of premises and equipment ........................... (2,373) (2,791) (2,924)
Sales of real estate .......................................... 24,900 44,923 58,536
Investment in and acquisition of real estate .................. (1,771) (1,738) (3,512)
Other, net .................................................... 754 (3,861) 254
----------- ----------- -----------
Net cash used in investing activities ......................... (236,770) (328,279) (180,252)
----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-86
<PAGE>
SFFED CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits ................. $ 286,369 $(169,676) $ (92,625)
Certificate account deposits ............................... 458,162 896,549 538,089
Certificate account withdrawals ............................ (533,276) (544,995) (416,881)
Increase (decrease) in borrowings with maturities of three
months or less ............................................ (20,848) 53,397 57,941
Proceeds from long-term borrowings ......................... 1,047,876 809,710 624,368
Principal payments on long-term borrowings ................. (998,289) (688,979) (494,194)
Proceeds from issuance of common stock ..................... 376 404 488
Payment of dividends ....................................... (2,042) (2,192) (1,166)
----------- ------------ -----------
Net cash provided by financing activities .................. 238,328 354,218 216,020
----------- ------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................. 30,045 2,032 18,356
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............. 165,206 163,174 144,818
----------- ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................... $ 195,251 $ 165,206 $ 163,174
=========== ============ ===========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest on customer deposits .......................... $ 135,557 $ 100,626 $ 95,663
Interest on borrowings ................................. 54,542 32,402 34,061
Income taxes ........................................... -- 466 8,479
Non-cash investing activities:
Transfers of loans to real estate owned ................ 39,242 58,295 43,809
Loans converted to mortgage-backed securities .......... 499,657 91,958 142,136
Mortgage-backed securities transferred to
available-for-sale portfolio ......................... -- -- 379,135
Mortgage-backed securities transferred from
available-for-sale portfolio to held-for-investment
portfolio ............................................ -- 258,344 --
Loans transferred from held-for-sale portfolio to
held-for-investment portfolio ........................ 11,013 77,195 --
</TABLE>
See Notes to Consolidated Financial Statements.
F-87
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
SFFed Corp. (SFFed) and its wholly owned subsidiary; San Francisco Federal
Savings and Loan Association (the Association) and its subsidiaries;
Franciscan Financial Corporation, Development Credit Corporation, Capital
Conveyance Company and Capital CMO Services and the subsidiary of Franciscan
Financial Corporation; San Francisco Auxiliary Corporation. All significant
intercompany transactions have been eliminated.
PRIMARY BUSINESS ACTIVITIES
The SFFed's principal business is attracting deposits from the general
public and using such funds, along with borrowings from various other
sources, to originate real estate loans secured by deeds of trust, other
loans and to make short-term investments. SFFed's revenues are primarily
interest received from its loan portfolio, investment securities and
mortgage-backed securities and fees related to originating and servicing
loans.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, SFFed considers all highly
liquid investments purchased with an initial maturity of three months or less
to be cash equivalents.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
SFFed enters into purchases of securities under agreements to resell
(repurchase agreements). The amounts advanced under these agreements
represent short-term loans.
MORTGAGE-BACKED SECURITIES (MBS)
SFFed has converted certain qualifying real estate loans in its portfolio
to Federal Home Loan Mortgage Corporation (FHLMC) and Federal National
Mortgage Association (FNMA) MBS. Additionally, SFFed has purchased MBS
through established securities dealers. Effective December 31, 1993 SFFed
adopted Statement of Financial Accounting Standards No. 115 Accounting for
Certain Investments in Debt and Equity Securities (SFAS 115). In accordance
with the provision of FAS 115, SFFed has identified MBS as either held for
investment or available for sale. SFFed does not have any trading securities.
Premiums and discounts on purchased MBS are amortized or accreted over the
expected life of the underlying mortgages using the interest method.
MBS HELD FOR INVESTMENT
SFFed has the positive intent and ability to hold these MBS to maturity.
These MBS are reported at cost net of any applicable premium or discount.
Transfers of MBS available-for-sale to MBS held-for- investment portfolio are
recorded at fair value. The related net unrealized holding gains or losses,
net of applicable income taxes, at the date of transfer are reported as a
separate component of stockholders' equity and amortized over the remaining
contractual life of these securities using the interest method.
MBS AVAILABLE FOR SALE
These MBS are reported at their aggregate fair value. Net unrealized gains
and losses are excluded from earnings and reported, net of applicable income
taxes, as a separate component of stockholders' equity until realized. Gains
and losses from the sale of MBS available for sale are determined using the
F-88
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
specific identification method. Any permanent decline in the fair value of
individual securities held for investment and available for sale below their
cost would be recognized through a write-down of the individual securities to
their fair value by a charge to earnings as a realized loss.
LOANS HELD FOR SALE
During the period of origination, real estate loans are designated as held
either for sale or investment purposes. Loans held for sale are carried at
the lower of cost or estimated market value, determined on an aggregate
basis. Transfers of loans held for sale to the held-for-investment portfolio
are recorded at the lower of cost or market value on the transfer date.
Net unrealized losses are recognized through a valuation allowance by
charges to income.
IMPAIRED AND NON-PERFORMING LOANS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan ("SFAS 114"), in May 1993 and Statement of Financial
Standards No. 118, Accounting for Creditors for Impairment of a Loan-Income
Recognition and Disclosures ("SFAS 118") (an amendment of SFAS 114), in
October 1994. SFFed adopted SFAS 114 and SFAS 118 effective January 1, 1993.
SFFed, in accordance with the methods prescribed under SFAS 114, considers a
loan impaired when it is "probable" that a creditor will be unable to collect
all amounts due (i.e., both principal and interest) according to the
contractual terms of the loan agreement. The measurement of impairment may be
based on (i) the present value of the expected future cash flows of the
impaired loan discounted at the loan's original effective interest rate, (ii)
the observable market price of the impaired loan, or (iii) the fair value of
the collateral of a collateral-dependent loan. The amount by which the
recorded investment of the loan exceeds the measure of the impaired loan is
recognized by recording a valuation allowance with a corresponding charge to
the provision for loan losses. SFFed has defined residential 1-4 loans and
consumer loans as homogenous loans. Homogenous loans that have had a
modification of terms are individually reviewed to determine if they meet the
definition of a troubled debt restructuring. SFFed's loans are secured
primarily by real estate and therefore, measurement of impairment is based
upon the fair value of the property collateralizing the loan. Where
impairment is determined to be permanent, a charge-off is recorded; where
impairment may be temporary, an allowance is established. SFFed, before the
adoption of SFAS 114, measured loan impairment with the methods prescribed in
this pronouncement. As a result, no additional loss provisions were required
by adoption of SFAS 114.
All loans designated by SFFed as "impaired" are either placed on
non-accrual status or are designated as restructured and are included with
those loans reported as non-performing. SFFed's non-performing loans consist
of loans on which SFFed has ceased the accrual of interest ("non-accrual
loans") and loans on which various concessions have have been made with
respect to the interest rate or other terms due to the inability of the
borrower to service the obligation under the original terms of the agreement
("restructured loans"). It is SFFed's policy to place a loan on non-accrual
status in the event that the borrower is 90 days or more delinquent or
earlier if the timely collection of interest and/or principal appears
doubtful or the risk of default is probable.
ALLOWANCE FOR LOAN LOSSES
SFFed maintains a loan monitoring system which provides a means for the
timely identification of impaired loans and to permit the evaluation of the
adequacy of the allowance for losses. SFFed has established valuation
allowances for estimated losses on specific loans ("specific allowances") and
for the inherent risk in the loan portfolio which has yet to be specifically
identified ("general allowances"). Specific allowances are provided when a
decline in the value of an impaired loan is identified, based upon the excess
of the outstanding loan amount over the fair value of the related collateral
plus holding and
F-89
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
selling costs. General allowances are established based upon the inherent
risk in the loan portfolio that has not been specifically identified. In
conjunction with a review of the loan portfolio, the allowance for loan
losses is evaluated quarterly and maintained at a level believed adequate by
management to absorb estimated probable losses. In evaluating the general
allowance for loan losses, management considers various factors including
historical loss experience, the level and trend of delinquent real estate
conditions, and the composition of the loan portfolio. Losses incurred upon
initial acquisition of real estate owned through foreclosure are charged to
the allowance for loan losses.
While management uses currently available information in evaluating and
adjusting the allowance for loan losses, additions to the allowance may be
required because of changes in future economic, real estate and other
conditions beyond SFFed's control.
INTEREST ON LOANS
Interest on loans is credited to income when earned. Interest is not
recognized on loans that are considered to be uncollectible or in the process
of foreclosure. In general, loans are placed on a non-accrual status when
they become 90 days delinquent and a reserve is established for previously
accrued but uncollected interest on such loans. Interest income received on
non-accrual loans is recognized during the year using the cash basis method
of income recognition.
LOAN ORIGINATION FEES
SFFed charges fees for originating loans. These fees, net of certain
related direct loan origination costs, are recognized as an adjustment of the
loan's yield over the contractual life of the loan using the interest method,
which results in a constant rate of return. When a loan is paid-off or sold,
the unamortized balance of any related fees and costs is recognized as
income. Other loan fees and charges representing service costs are reported
in income when collected or earned.
SALES OF LOANS
Gains or losses resulting from sales of loans or interests in loans are
recorded at the time of sale and are determined by the difference between the
net sales proceeds and the carrying value of the assets sold. When the right
to service the loans is retained, a gain or loss is recognized based upon the
net present value of expected amounts to be received or paid resulting from
the difference between the contractual interest rates received from the
borrowers and the rate paid to the buyer, taking into account estimated
prepayments on such loans. Excluded from the net present value portion of the
gain or loss is an amount equal to the present value of a normal servicing
fee. The net asset resulting from the present value computation, representing
deferred revenue or expense, is amortized to operations over the estimated
remaining life of the loan using a method that approximates the interest
method. The balance of deferred revenue and expense has been adjusted as
necessary for loan prepayments in excess of, or below, estimated prepayments.
(See Note 6). Any loans held for sale by SFFed are carried at the lower of
cost or market.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation of office property and equipment is computed
using the straight-line method over the estimated useful lives of the various
classes of assets. Amortization of leasehold improvements is provided for
using the straight-line method over the remaining term of the lease or the
estimated useful life of the asset, whichever is less. Maintenance and
repairs are charged to expense and improvements are capitalized.
REAL ESTATE OWNED
Real estate acquired in settlement of loans is initially recorded at the
lower of the unpaid loan balance or fair value at the date acquired.
Subsequent adjustments, if any, are made when the carrying
F-90
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value exceeds estimated fair value. Costs related to the development of such
properties are capitalized and costs related to holding are charged to
expense. Real estate acquired for sale or development is carried at the lower
of cost or estimated net realizable value. The carrying value of this real
estate includes capitalized development and construction costs. The carrying
value is reviewed periodically and adjusted when it exceeds net realizable
value. Interest is capitalized on funds disbursed during the development and
construction period for real estate projects.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED (GOODWILL)
Goodwill is stated net of accumulated amortization and is being amortized
using the straight-line method over periods ranging from 5 to 25 years.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
SFFed enters into sales of securities under agreements to repurchase
(reverse repurchase agreements). Fixed-coupon reverse repurchase agreements
are treated as financing arrangements, and the obligations to repurchase
securities sold are reflected as a liability in the consolidated statements
of financial condition. The securities underlying the agreements remain in
the asset accounts.
TAXES ON INCOME
SFFed accounts for income taxes in accordance with the provisions of the
Statement of Financial Accounting Standards No. 109 Accounting for Income
Taxes (SFAS 109). SFAS 109 requires the use of an asset and liability
approach whereby deferred income taxes are computed by applying enacted tax
laws and rates applicable to future periods to the temporary differences
between the tax bases of assets and liabilities and their carrying values for
financial reporting purposes. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that
includes the enactment date. Future tax benefits attributable to temporary
differences are recognized to the extent the realization of such benefits is
more likely than not.
EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares
outstanding (including the dilutive effect of unexercised stock options):
7,855,919, 7,827,665 and 7,956,090 for 1995, 1994 and 1993, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1995, the Financial Accounting Standards Board issued several
Statements of Financial Accounting Standards, ("SFAS's") which are described
below. SFFed has not assessed the impact of these Statements on its financial
position or its result of operations because of SFFed's acquisition by First
Nationwide Bank, A Federal Savings Bank (see Note 2).
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
("SFAS 121"), was issued in March 1995. The Statement addresses the
accounting for the impairment of long-lived assets, such as premises,
furniture and equipment, certain identifiable intangibles and goodwill
related to those assets. Long-lived assets and certain identifiable
intangibles are to be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss is recognized when the sum of the future cash
flows (undiscounted and without interest charges expected from the use of the
asset and its eventual disposition) is less than the carrying amount of the
asset. The Statement also requires that long-lived assets and identifiable
intangibles, except for assets of a discontinued operation held for disposal,
be accounted for at the lower of cost or fair value less cost to sell. SFAS
121 is effective for financial statements for periods beginning after
December 15, 1995.
F-91
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In May 1995, the Financial Accounting Standards Board issued SFAS No.
122, Accounting for Mortgage Servicing Rights ("SFAS 122"). SFAS 122 requires
that an enterprise that acquires servicing rights through either the purchase
or origination of mortgage loans and sells or securitizes these mortgage
loans with servicing rights retained should allocate the total cost of the
mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values. SFAS 122 is
effective for financial statements for periods beginning after December 15,
1995.
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), was
issued in October 1995. This Statement prescribes accounting and reporting
standards for all stock-based compensation plans, including employee stock
options, restricted stock and stock appreciation rights. The Statement
defines a "fair value based method" of accounting for employee stock options
and encourages all entities to adopt that method of accounting for all of
their employee stock compensation plans. However, it also allows an entity to
continue to measure compensation for those plans using the "intrinsic value
based method" under Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("Opinion No. 25").
Under the fair value based method, compensation cost is measured at the
grant date of the option based on the value of the award and is recognized
over the service period, which is usually the vesting period. Under the
intrinsic value based method, compensation cost is the excess, if any, of the
quoted market price of the stock at grant date or other measurement date over
the amount an employee must pay to acquire the stock. Under Opinion No. 25,
no compensation cost is recognized.
SFAS 123 requires that an employer's financial statements include certain
disclosures about stock-based compensation agreements regardless of the
method used to account for them. An employer that continues to apply the
accounting provisions of Opinion No. 25 will disclose pro forma amounts that
reflect the difference between compensation cost, if any, included in results
of operations and the related cost measured by the fair value based method,
including tax effects, that would have been recognized in the statement of
operations if the fair value based method had been used. SFAS 123 is
effective for transactions entered into after December 15, 1995.
USE OF FINANCIAL ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain of the 1994 and 1993 consolidated financial statement amounts have
been reclassified to conform to the 1995 presentation.
NOTE 2 -- ACQUISITION BY FIRST NATIONWIDE BANK
On August 27, 1995, SFFed entered into an Agreement and Plan of Merger
(the "Merger Agreement") with First Nationwide Bank, A Federal Savings Bank
("First Nationwide"), pursuant to which SFFed was acquired.
The acquisition by and merger into First Nationwide was consummated on
February 1, 1996. Under the Merger Agreement, holders of SFFed common stock
outstanding at the effective time of the merger (other than shares for which
dissenter's rights were perfected, shares held by First Nationwide and shares
held as treasury stock) received $32 per share. The holders of options on the
common stock of SFFed received for each share subject to an option the
difference between $32 and the applicable per share
F-92
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
option price. The aggregate consideration paid by First Nationwide under the
Merger Agreement was approximately $264,000,000. In connection with the
acquisition by First Nationwide, at December 31, 1995, SFFed accrued
approximately $9,600,000 of investment banker and legal fees, contract
termination costs, severance and other employee related costs.
NOTE 3 -- CASH AND INVESTMENTS
SFFed's banking depositories apply an imputed interest credit to balances
left on deposit which is used as an offset to charges for banking services
rendered. The Association is required by the Federal Reserve System to
maintain noninterest-bearing cash balances against some of its customer
certificate and transaction deposit accounts. The required reserves averaged
$3,016,000 during the year ended December 31, 1995. SFFed does not maintain
compensating balances with banks.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The following is a summary of these securities:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at end of period, comprised of mortgage-backed
securities ..................................................... $165,000 $112,000
========== ==========
Average balance during each year ................................ $149,412 $102,983
Maximum balance at any month end ................................ 175,000 138,000
Weighted average interest rate .................................. 6.12% 6.12%
Weighted average days to maturity ............................... 4 4
</TABLE>
These agreements are collateralized by mortgage-backed securities and
loans. At December 31, 1995 and 1994, all agreements to resell securities
were for securities identical to those purchased and were executed with five
primary dealers. The related collateral was held by the dealers arranging the
transactions.
FEDERAL HOME LOAN BANK STOCK
At December 31, 1995 and 1994, this investment consisted of 315,795 and
300,492 shares, respectively, of Federal Home Loan Bank of San Francisco
(FHLB) $100 par value capital stock at cost. The amount of stock owned meets
the last annual regulatory determination. The FHLB capital stock is pledged
to secure borrowings from the FHLB.
NOTE 4 -- MORTGAGE-BACKED SECURITIES [MBS]
SFFed has classified a portion of its MBS portfolio as "available for
sale" as of December 31, 1995 and 1994. At December 31, 1995 and 1994 the
available-for-sale MBS portfolio is reported in the Consolidated Statements
of Financial Condition at fair value. The held-for-investment MBS portfolio
is reported at amortized cost. At December 31, 1995 SFFed reflected an
unrealized loss on the MBS portfolio, net of tax, of $1,128,000 as a decrease
to stockholders' equity. At December 31, 1994 the unrealized gain on the MBS
portfolio of $3,449,000, net of tax.
F-93
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amount of MBS and their approximate fair values at December
31, 1995 and 1994 were as follows:
MBS available for sale:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1995
Adjustable rate $46,668 $ 533 -- $47,201
Fixed rate ...... 25,328 539 $ (224) 25,643
----------- ------------ ------------ ---------
Total ........ $71,996 $1,072 $ (224) $72,844
=========== ============ ============ =========
Weighted average
interest rate . 6.53%
===========
December 31, 1994
Adjustable rate $50,242 -- $(1,662) $48,580
Fixed Rate ...... 30,218 $ 127 (1,467) 28,878
----------- ------------ ------------ ---------
$80,460 $ 127 $(3,129) $77,458
=========== ============ ============ =========
Weighted average
interest rate . 6.17%
===========
</TABLE>
F-94
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MBS held for investment are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES PAR VALUE
----------- ------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1995
Adjustable rate ................ $776,397 $ 9,220 $ (79) $785,538
Fixed rate ..................... 83,157 3,780 -- 86,937
----------- ------------ ------------ ----------
Total .......................... $859,554 $13,000 $ (79) $872,475
=========== ============ ============ ==========
Weighted average interest rate 7.32%
===========
December 31, 1994
Adjustable rate ............... $324,757 -- $(7,136) $317,621
Fixed rate .................... 5,821 $ 23 (208) 5,636
----------- ------------ ------------ ----------
$330,578 $ 23 $(7,344) $323,257
=========== ============ ============ ==========
Weighted average interest rate 5.92%
===========
</TABLE>
The scheduled maturities of MBS available for sale and MBS held for
investment at December 31, 1995, were as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD FOR INVESTMENT
---------------------- -----------------------
AMORTIZED FAIR AMORTIZED
COST VALUE COST FAIR VALUE
----------- --------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Due from one year to five years $12,158 $11,934 -- --
Due from five years to ten years 894 937 -- --
Due after ten years ............. 58,944 59,973 $859,554 $872,475
----------- --------- ----------- ----------
$71,996 $72,844 $859,554 $872,475
=========== ========= =========== ==========
</TABLE>
The amortized cost of SFFed's MBS portfolio, pledged as collateral in
conjunction with various borrowings and transactions, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Collateral for:
Local government agency deposits ...... $ 550 $ 545
Reverse repurchase agreements (Note 10) 791,665 371,679
FNMA servicing ......................... 4,638 18,599
---------- ----------
$796,853 $390,823
========== ==========
</TABLE>
At December 31, 1995 and 1994, accrued interest receivable on MBS amounted
to $5,836,000 and $2,160,000, respectively.
MBS converted from SFFed originated loans included in the amortized cost
of MBS available for sale and held for investment at December 31, 1995
totalled $36,056,000 and $740,158,000, respectively (December 31, 1994,
$41,285,000 and $284,087,000).
In accordance with the provisions of SFAS 115, the MBS portfolio has been
classified in the Consolidated Statements of Financial Condition according to
management's intent. At June 30, 1994, as a result of a revision of its
long-term business plans, SFFed transferred $258,344,000 of its MBS from the
F-95
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
available-for-sale portfolio to its held-for-investment portfolio. The
unrealized holding loss at the date of transfer, in the amount of $3,055,000,
is being amortized as a yield adjustment over the remaining life of these
MBS. At December 31, 1995, the unrealized holding loss related to this
transfer is reflected as a $1,620,000, net of tax, reduction in stockholders'
equity.
NOTE 5 -- LOANS RECEIVABLE HELD FOR INVESTMENT
Loans receivable held for investment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
One-to-four family residential loans .... $1,535,791 $1,764,572
Multi-family residential loans ........... 628,410 648,491
Commercial property loans ................ 465,466 500,106
Construction and improved land loans .... 40,230 54,489
------------ ------------
2,669,897 2,967,658
Consumer loans ........................... 94,749 91,928
Loans secured by savings accounts ....... 7,528 6,689
------------ ------------
2,772,174 3,066,275
Less:
Undisbursed loan funds .................. (16,468) (12,557)
Deferred loan fees, net ................. (1,160) (4,292)
Discounts and premiums, net ............. (955) (1,093)
Allowance for loan losses (Note 5) ..... (38,603) (36,829)
------------ ------------
Loans receivable held for investment, net $2,714,988 $3,011,504
============ ============
Weighted average interest rate ........... 7.88% 6.90%
============ ============
</TABLE>
The above classifications are net of participation interests in loans sold
and loans serviced for others.
F-96
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is an analysis, by property type, of commercial real estate
loans included above:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Office buildings $225,130 $233,234
Warehouses ....... 93,628 100,813
Shopping centers 17,610 53,970
Motels ........... 20,098 15,958
General purpose . 53,709 24,281
Mobile home parts 9,007 10,449
Other ............ 46,284 61,401
---------- ----------
$465,466 $500,106
========== ==========
</TABLE>
Certain of SFFed's real estate loans are pledged as collateral for
borrowings from various sources, as summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Collateral for:
FHLB advances (Note 10) ........................ $1,016,450 $1,109,092
Deposits of state and local government agencies 3,502 4,887
------------ ------------
$1,019,952 $1,113,979
============ ============
</TABLE>
At December 31, 1995 and 1994, accrued interest receivable on loans
amounted to $17,389,000 and $16,184,000, respectively.
Over 99% of SFFed's loan portfolio is secured by property within the state
of California. Additionally, 61% of SFFed's loan portfolio is secured by
property located within the greater San Francisco Bay Area. Accordingly, the
ultimate collectibility of SFFed's loan portfolio is susceptible to changes
in the regional economics and real estate markets within Northern California
and, to a lesser extent, in Southern California.
On occasion, SFFed restructures major loans, generally because of a
borrower's financial difficulties. Interest rate and cash payment concessions
and an extension of a loan's maturity may be granted in such restructurings.
F-97
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information concerning impaired loans that were past due for three months
or more or in the process of foreclosure, (nonaccrual loans), and
restructured loans, is summarized as follows:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans:
Balance at year end ................................ $40,976 $44,809 $81,067
Interest foregone .................................. 3,259 3,829 4,362
Restructured loans:
Balance at year end (1) ............................ 4,304 29,639 33,044
Actual interest income recognized .................. 1,123 2,305 2,284
Pro-forma interest income using original loan terms 1,119 2,358 2,387
</TABLE>
- ------------
(1) Ending balances are shown of net of nonaccrual loans. During the second
quarter of 1995, SFFed re-evaluated its policies on restructured loans
and determined that several loans that had been restructured were
current for several years. As such, the December 31, 1995 balance does
not include these loans.
At December 31, 1995, the aggregate investment in loans considered to be
impaired under SFAS 114 was $45,280,000. Included in this amount is
$12,463,000 of impaired loans for which the related allowance for loan losses
was $3,665,000 and $32,817,000 of loans for which no allowance was considered
necessary. The average recorded investment in impaired loans during the year
ended December 31, 1995 was approximately $61,225,000. For the year ended
December 31, 1995, SFFed recognized interest income on those impaired loans
of $1,123,000. Interest income recognized during the year using the cash
basis method of income recognition cannot be practicably determined.
At December 31, 1994, SFFed's aggregate investment in loans considered
impaired under SFAS 114 was $74,448,000. Included in this amount is
$18,069,000 of impaired loans for which the related allowance for loan losses
was $2,430,000 and $56,379,000 of loans for which no allowance was considered
necessary. SFFed recognized approximately $2,305,000 of interest income on
these loans in 1994.
Activity in the allowance for losses on loans, real estate owned and other
transactions is summarized as follows:
<TABLE>
<CAPTION>
REAL ESTATE CONSUMER TOTAL REAL ESTATE
LOANS LOANS LOANS OWNED OTHER(1) TOTAL
------------- ---------- ---------- ------------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 ..... $ 33,194 $ 717 $ 33,911 $ 6,645 $ 838 $ 41,394
Provision for losses (recoveries) 6,279 304 6,583 7,134 (90) 13,627
Charge-offs ...................... (3,290) (603) (3,893) (5,975) -- (9,868)
Recoveries ....................... 25 171 196 -- -- 196
------------- ---------- ---------- ------------- -------- ----------
Balance at December 31, 1993 ..... 36,208 589 36,797 7,804 748 45,349
Provision for losses ............. 16,828 377 17,205 8,336 188 25,729
Charge-offs ...................... (16,830) (605) (17,435) (4,980) (200) (22,615)
Recoveries ....................... 59 203 262 -- -- 262
------------- ---------- ---------- ------------- -------- ----------
Balance at December 31, 1994 ..... 36,265 564 36,829 11,160 736 48,725
Provision for losses ............. 10,169 925 11,094 3,832 1,042 15,968
Charge-offs ...................... (8,895) (945) (9,840) (1,902) (28) (11,770)
Recoveries ....................... 262 258 520 -- -- 520
------------- ---------- ---------- ------------- -------- ----------
Balance at December 31, 1995 ..... $ 37,801 $ 802 $ 38,603 $13,090 $1,750 $ 53,443
============= ========== ========== ============= ======== ==========
</TABLE>
- ------------
(1) The 1995, 1994 and 1993 provision for losses (recoveries) included
$1,042,000, $188,000 and ($90,000), respectively, related to real
estate development projects.
F-98
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- MORTGAGE BANKING
Loans held for sale are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
-------------------- --------------------
CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE
---------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Adjustable-rate single-family loans -- -- $3,627 $3,627
Fixed-rate single-family loans ..... $4,393 $4,393 -- --
---------- -------- ---------- --------
$4,393 $4,393 $3,627 $3,627
========== ======== ========== ========
</TABLE>
SFFed services loans for others amounting to $1,829,863,000,
$1,454,344,000 and $1,518,546,000 at December 31, 1995, 1994 and 1993,
respectively, and are not included in the accompanying Consolidated
Statements of Financial Condition. Income from loan servicing amounted to
$5,460,000, $4,080,000 and $2,621,000 for the years ended December 31, 1995,
1994 and 1993, respectively. Custodial balances maintained in connection with
loans serviced for others were approximately $12,399,000, $8,310,000 and
$31,902,000 at December 31, 1995, 1994 and 1993, respectively.
Activity in the net deferred premiums resulting from sales of loans,
participation interests in loans and securitization of loans when servicing
rights are retained for the three years ended December 31, is summarized as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year ............................. $ 2,803 $ 3,424 $ 5,361
Additions to gain on sale of loans ....................... 12 175 364
Amortization charged to loan servicing income:
Regular ................................................. (1,447) (1,696) (1,826)
(Increase) decrease due to changes in actual and
estimated prepayments ................................... 980 900 (475)
--------- --------- ---------
Balance at end of year ................................... $ 2,348 $ 2,803 $ 3,424
========= ========= =========
</TABLE>
NOTE 7 -- PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
-------------------- USEFUL LIVES
1995 1994 ------------
---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Land ........................................... $ 4,811 $ 4,811 --
Buildings ...................................... 10,170 10,064 40 years
Leasehold improvements ......................... 14,717 13,754 Life of lease
Furniture and equipment ........................ 22,347 23,447 5-20 years
Construction in progress ....................... 57 131 --
---------- --------
52,102 52,207
Less accumulated depreciation and amortization (30,203) 29,261
---------- --------
$ 21,899 $22,946
========== ========
</TABLE>
F-99
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and amortization expense amounted to $3,206,000, $3,226,000
and $3,043,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
NOTE 8 -- REAL ESTATE OWNED
Real estate owned is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Real estate acquired through foreclosure and held for sale or development $ 45,494 $ 36,944
Less allowance for losses (Note 5) ....................................... (13,090) (11,160)
---------- ----------
$ 32,404 $ 25,784
========== ==========
</TABLE>
Real estate acquired by foreclosure during 1995 and 1994, as adjusted to
the lower of cost or fair value, amounted to $34,580,000 and $47,436,000,
respectively.
F-100
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- CUSTOMER DEPOSITS
Customer deposits consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1995 1994
---------------------- ----------------------
AMOUNT % AMOUNT %
------------- ------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Passbook accounts:
0.01 to 4.50% ........................ $ 572,848 21.3% $ 76,250 3.1%
NOW and money market deposit accounts:
0.01 to 6.00% ........................ 279,867 10.4 490,153 19.7
------------ -------- ------------ --------
Demand deposits ....................... 852,715 31.7 566,403 22.8
------------ -------- ------------ --------
Certificate accounts:
Less than 3.00% ...................... 15,022 0.6 33,858 1.4
3.00 to 4.99% ........................ 132,192 4.9 863,911 34.8
5.00 to 6.99% ........................ 1,548,151 57.4 921,283 37.1
7.00 to 8.99% ........................ 144,910 5.4 95,133 3.8
9.00 to 10.99% ....................... 196 -- 1,350 0.1
11.00% and above ..................... 57 -- 50 --
------------ -------- ------------ --------
Total certificate accounts ............ 1,840,528 68.3 1,915,585 77.2
------------ -------- ------------ --------
Total customer deposits ............... $2,693,243 100.0% $2,481,988 100.0%
============ ======== ============ ========
Weighted average interest rate ....... 5.13% 4.61%
======== ========
</TABLE>
Noninterest bearing deposits were $29,061,000 and $23,335,000 at December
31, 1995 and 1994, respectively.
A summary of certificate accounts by maturity is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1995 1994
---------------------- ---------------------
AMOUNT % AMOUNT %
------------- ------ ------------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Maturity within one year $1,108,847 60.3% $1,316,580 68.7%
One to two years ......... 243,006 13.2 334,842 17.5
Two to three years ....... 127,333 6.9 156,595 8.2
Three or more years ..... 361,342 19.6 107,568 5.6
------------ -------- ------------ -------
$1,840,528 100.0% $1,915,585 100.0%
============ ======== ============ =======
</TABLE>
Customer deposits include approximately $387,385,000 and $373,347,000 of
accounts in excess of $100,000 at December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, accrued interest payable on customer
deposits, included in other liabilities in the accompanying Statements of
Financial Condition, was $363,000 and $491,000, respectively.
F-101
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A tabulation of interest expense on customer deposits follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Demand deposits ...... $ 29,580 $ 14,592 $19,590
Certificate accounts 105,719 86,819 75,213
---------- ---------- ---------
$135,299 $101,411 $94,803
========== ========== =========
</TABLE>
NOTE 10 -- BORROWINGS
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
SFFed enters into agreements with broker-dealers and other financial
institutions to repurchase securities previously sold. These agreements are
effectively short-term borrowings secured by MBS (see Note 4). Securities
sold under the terms of these agreements are held by the securities dealers
who arrange the transactions.
Information related to securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at end of period ......... $713,362 $347,679
========== ==========
Average balance during each year $658,953 $261,368
Maximum balance at any month end 871,722 347,679
Weighted average interest rate .. 6.14% 5.74%
</TABLE>
At December 31, 1995, $659,442,000 of SFFed's agreements mature in one
year or less, and $53,920,000 mature in 1998.
ADVANCES FROM THE FEDERAL HOME LOAN BANK OF SAN FRANCISCO
Each Federal Home Loan Bank (FHLB) is authorized to make advances to its
member associations, subject to such regulations and limitations that the
Federal Housing Finance Board may prescribe. SFFed's borrowings from the FHLB
consist of notes payable with interest rates ranging from 4.11% to 9.10%. The
maturity and weighted average interest rate of the advances outstanding at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
YEAR ENDING DECEMBER 31: THOUSANDS)
- -------------------------------
<S> <C>
1996 ........................... $266,969
1997 ........................... 7,500
1998 ........................... --
1999 ........................... --
2000 ........................... --
Thereafter ..................... 483
--------------------
$274,952
====================
Weighted average interest rate 6.90%
====================
</TABLE>
F-102
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1995 and 1994, SFFed had pledged certain real estate
loans (see Note 5), mortgage-backed securities (see Note 4) and SFFed's
investment in stock of the FHLB of San Francisco (see Note 3) to secure FHLB
advances.
MORTGAGE-BACKED BONDS
In September 1994, SFFed retired the collateralized mortgage obligation at
face value and incurred a loss of $347,000.
SENIOR NOTES
In September 1994, SFFed issued $50,000,000 of its senior notes due
September 1, 2004. The notes are reported net of unamortized issuance costs.
The notes bear interest at the rate of 11.20% payable semi-annually on March
1 and September 1. Under the terms of the notes, SFFed may not make any
prepayments of principal, except that in the event of a change in control of
SFFed, SFFed shall offer to prepay the notes in full. SFFed may contribute up
to $34,000,000 from the proceeds of the note sale to the Association in the
form of equity capital and by December 31, 1995 SFFed had so contributed
$30,000,000.
The note agreement contains certain restrictive covenants which, among
other things, (1) require SFFed to maintain certain capital levels, (2)
restrict the amount of funds available for payment of dividends on SFFed's
stock or for the repurchase of its stock and (3) establish a maximum ratio of
non-performing assets (as defined) to consolidated total assets. If an event
of default occurs, including failure to comply with any restrictive covenant,
the notes may become immediately payable in full. SFFed was in compliance
with all terms of the note agreement at December 31, 1995.
NOTE 11 -- TAXES ON INCOME
The provision (benefit) for taxes on income in the Consolidated Statements
of Operations is comprised of the following items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
-------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal income tax ....... $ (760) $ (357) $ 9,338
California franchise tax (15) (383) 3,617
-------- ---------- ---------
(775) (740) 12,955
-------- ---------- ---------
Deferred:
Federal income tax ....... 873 (1,748) (3,453)
California franchise tax 1,470 (912) (1,597)
-------- ---------- ---------
2,343 (2,660) (5,050)
-------- ---------- ---------
Total:
Federal income tax ....... 113 (2,105) 5,885
California franchise tax 1,455 (1,295) 2,020
-------- ---------- ---------
$1,568 $(3,400) $ 7,905
======== ========== =========
</TABLE>
F-103
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The liability for taxes on income at December 31, 1995 and 1994 in the
accompanying Consolidated Statements of Financial Condition includes a
deferred tax liability totalling $1.9 million for 1995 and a net deferred tax
asset totalling $2.3 million for 1994, that have been provided for the
temporary differences between the tax bases and financial statement carrying
amounts of assets and liabilities. Tax benefits attributable to temporary
differences are recognized to the extent that realization of such benefits is
more likely than not. The major sources of these temporary differences
comprising SFFed's net deferred tax liability and net deferred tax (asset) at
December 31, 1995 and 1994, respectively, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Loan fee income and discounts deferred for tax
purposes ..................................... $ 18,508 $ 17,243
FHLB stock dividends ........................... 3,244 2,311
Deferred servicing-related premiums on loans ... 933 999
Tax basis versus financial statement basis
depreciation expense ......................... 2,701 2,846
Investments in partnerships .................... 54 179
Other .......................................... -- 682
---------- ----------
Gross deferred tax liabilities .................. 25,440 24,260
---------- ----------
GROSS DEFERRED TAX ASSETS:
Federal tax basis loss carryovers .............. (12) (648)
Deferred interest on restructured loans ........ (605) (692)
Accrued pension plan contributions ............. (6,160) (4,380)
Book basis loss reserves ....................... (13,349) (17,052)
Minimum pension liability adjustment ........... (241) (376)
CMO investment trust ........................... (972) (887)
Unrealized loss on securities available for sale (709) (2,507)
Contract accruals .............................. (1,373) --
Other .......................................... (106) --
---------- ----------
Gross deferred tax assets ....................... (23,527) (26,542)
---------- ----------
Net deferred tax liability (asset) .............. $ 1,913 $ (2,282)
========== ==========
</TABLE>
F-104
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The differences between the federal statutory income tax rate and the
effective rate of SFFed's tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- --------- -------
<S> <C> <C> <C>
Federal statutory tax rate ...................... 35.0% (35.0)% 35.0%
Increase (reduction) in tax rate resulting from:
California franchise tax, net of federal
benefit ..................................... 7.5 (7.5) 7.4
Amortization and write-down of intangible asset 20.9 3.1 1.4
Change in base year tax bad debt reserve ...... -- (5.0) (3.4)
Deferred tax adjustment resulting from tax rate
change ...................................... -- -- 1.1
Capitalized merger costs ...................... 84.9 -- --
Interest on officer's life insurance .......... (14.6) -- --
California enterprise zone deduction .......... (9.0) -- --
Other ......................................... (10.1) 2.6 2.9
-------- --------- -------
Effective tax rate .............................. 114.6% (41.8)% 44.4%
======== ========= =======
</TABLE>
Under the Internal Revenue Code, the Association in determining taxable
income is allowed a special bad debt deduction based on a percentage of
taxable income (8% for 1995, 1994 and 1993) or on specific experience
formulas. The Association used the experience method in 1995, 1994 and 1993
in determining the federal income tax bad debt deduction for tax return
purposes for each respective year.
A deferred tax liability has not been recognized for the amount of the
Association's tax bad debt reserves that arose in tax years beginning before
December 31, 1987. These reserves amounted to approximately $15.9 million at
both December 31, 1995 and 1994. The amount of the unrecognized deferred tax
liability on such reserves at both December 31, 1995 and 1994 was
approximately $5.6 million. This deferred tax liability could be recognized
if, in the future, (1) that portion of the Association's retained earnings
represented by these reserves is used for purposes other than to absorb
losses from bad debts, including dividends or distributions in liquidation,
(2) the Association fails to meet the definition of a "qualified savings
institution," or (3) there is a change in the federal tax law.
During 1994 the Internal Revenue Service (IRS) completed its examination
of SFFed's tax returns for the years 1989 and 1990. The IRS had previously
completed its examination of SFFed's tax returns for 1987 and 1988. As a
result of these examinations the IRS has proposed adjustments, primarily
related to timing differences as to the recognition of income and expense for
tax return purposes. The most significant proposed adjustment relates to
deferred loan fee income. SFFed filed a formal protest with the IRS in 1994
contesting the results of the audit of 1989 and 1990 (SFFed had previously
filed a protest with regards to the results of 1987 and 1988 examinations).
Taxes associated with the proposed adjustments which are being protested
amount to approximately $23.5 million. SFFed believes that the income tax
returns are substantially correct as originally filed. SFFed has established
a deferred tax liability in prior periods for substantially all the items
included in the IRS proposed adjustments. Accordingly, SFFed's exposure is
limited to interest on any tax deficiency that may finally be assessed. SFFed
believes that any additional tax and interest thereon which may be due will
not have a materially adverse effect on the consolidated financial position
or results of operations of SFFed.
F-105
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS
Office of Thrift Supervision (OTS) regulations issued pursuant to the
Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA)
specify minimum tangible, core and risk-based capital requirements for thrift
institutions. The amount of the Association's net worth included in its
minimum regulatory capital requirements is not available for the payment of
dividends and may only be used to cover any future losses. Various
adjustments are required to be made to stockholder's equity and total assets
for computing these capital ratios, depending on an institution's capital and
asset structure (see the following table). For purposes of computing the
risk-based capital requirement, the regulations assign a degree of credit
risk to each of a thrift's assets and off-balance sheet liabilities, ranging
from zero to 100%.
Under Section 38 of the Federal Deposit Insurance Corporation Improvement
Act of 1991 (FDICIA), federal banking authorities are required to take prompt
corrective action against undercapitalized financial institutions, imposing a
series of increasing constraints on the operations of such institutions,
depending on the level of their undercapitalization. There are five capital
levels specified by FDICIA, ranging from well capitalized to critically
undercapitalized. OTS regulations set forth the minimum capital ratios for
each of these levels. Based upon qualitative judgments made during its most
recent examination of an institution, the OTS may downgrade an institution's
capital level by one step (e.g., a well capitalized institution can be
reclassified as adequately capitalized). Under these regulations, the
Association is deemed to be well capitalized at December 31, 1995.
The Association's regulatory capital position at December 31, 1995 and
1994 is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------------- --------------------------
TANGIBLE, TANGIBLE,
CORE TIER 1 TOTAL CORE, TIER 1 TOTAL
RISK-BASED RISK-BASED RISK-BASED RISK-BASED
CAPITAL (1) CAPITAL CAPITAL (1) CAPITAL
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Capital per Association financial statements ..... $231,966 $231,966 $219,225 $219,225
Adjustments for regulatory capital purposes:
Goodwill (2) ..................................... (8,054) (8,054) (8,722) (8,722)
Investment in nonincludable subsidiaries (2) .... (8,924) (8,924) (8,205) (8,205)
Unrealized loss on securities available for sale,
net of tax ...................................... 1,128 1,128 3,449 3,449
General valuation allowances ...................... -- 27,829 -- 26,771
------------ ------------ ------------ ------------
Regulatory capital .............................. $216,116 $243,945 $205,747 $232,518
============ ============ ============ ============
</TABLE>
- ------------
(1) For the Association, there are no differences in these regulatory
capital computations.
(2) Also deducted from total assets for regulatory test purposes.
F-106
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
ACTUAL MINIMUM
DECEMBER 31, 1995 REQUIREMENT
------------------- -------------------
CAPITAL RATIO CAPITAL RATIO
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FIRREA Capital Standards:
Tangible ................................... $216,116 5.43% $ 59,717 1.50%
Core (leverage) ............................ 216,116 5.43 199,433 3.00
Risk-based ................................. 243,945 10.92 178,720 8.00
FDICIA Capital Standards (well capitalized):
Leverage ................................... $216,116 5.43% $199,056 5.00%
Tier 1 risk-based .......................... 216,116 9.67 134,041 6.00
Total risk-based ........................... 243,945 10.92 223,401 10.00
</TABLE>
<TABLE>
<CAPTION>
ACTUAL MINIMUM
DECEMBER 31, 1994 REQUIREMENT
------------------- -------------------
CAPITAL RATIO CAPITAL RATIO
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FIRREA Capital Standards:
Tangible .................................. $205,747 5.54% $ 55,666 1.50%
Core (leverage) ........................... 205,747 5.54 111,332 3.00
Risk-based ................................ 232,518 10.84 171,662 8.00
FDICIA Capital Standards (well capitalized):
Leverage .................................. $205,747 5.54 $185,552 5.00
Tier 1 risk-based ......................... 205,747 9.59 128,746 6.00
Total risk-based .......................... 232,518 10.84 214,577 10.00
</TABLE>
During 1995, the Company contributed $5,000,000 from the senior note
proceeds to the Association as equity capital. During 1994, the Company
contributed $30,000,000 to the Association as equity capital, including
$25,000,000 of the proceeds from the sale of its senior notes. See Note 10
concerning certain covenants included in the senior note agreement.
In August 1994, the OTS issued a regulation adding an interest rate risk
component to the risk-based capital requirement for thrifts. Those thrifts
that have an above normal interest rate risk exposure must take a deduction
from the total capital available in computing their risk-based capital
requirement. The regulation, which was to become effective as of December 31,
1994, has been postponed indefinitely, pending the testing of an OTS appeals
process at certain institutions and the impositions of similar requirements
by federal banking agencies. Based upon its December 31, 1995 computations,
SFFed does not currently have an above normal interest rate risk.
At periodic intervals, both the OTS and the FDIC routinely examine the
Association's financial statements as part of their legally prescribed
oversight of the savings and loan industry. Based on these examinations, the
regulators can direct that the Association's financial statements be adjusted
in accordance with their findings. No such adjustments were required by the
regulators as a result of their most recent examination of the Association
which was completed in March 1995.
Pursuant to a quarterly dividend policy initiated in 1993, SFFed paid cash
dividends totalling $2,042,000 or $0.26 per share on its common stock during
1995 compared with $0.28 per share in 1994 and $0.15 per share in 1993.
NOTE 13 -- PARENT COMPANY FINANCIAL INFORMATION
SFFed and its subsidiary file a consolidated federal income tax return in
which the taxable income or loss of SFFed is combined with that of its
subsidiary. SFFed's share of income tax expense is based on the amount which
would be payable if separate returns were filed. Accordingly, SFFed's equity
in the net income or loss of its subsidiary is excluded from the computation
of the provision for income taxes for financial statement purposes.
F-107
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFFed's statements of financial condition and related statements of
operations and cash flows are as follows:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash ..................................................................... $ 234 $ 169
Note receivable from subsidiary .......................................... 11,770 24,170
Tax benefit .............................................................. 3,613 893
Other assets ............................................................. 2,022 1,018
Investment in subsidiary ................................................. 231,966 219,225
---------- ----------
$249,605 $245,475
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses ......................................................... $ 4,970 $ 1,773
Senior notes (Note 10) ................................................... 49,245 49,158
Stockholders' equity (see Consolidated Statements of Financial Condition) 195,390 194,544
---------- ----------
$249,605 $245,475
========== ==========
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME
Dividend from subsidiary .......................................... $ -- $ -- $1,000
Interest on investments ........................................... 1,151 835 238
--------- ---------- --------
1,151 835 1,238
--------- ---------- --------
EXPENSES
General and administrative ........................................ 3,464 576 395
Interest on senior notes .......................................... 5,703 1,756 --
Federal and state income tax benefit .............................. (2,577) (605) (79)
--------- ---------- --------
6,590 1,727 316
--------- ---------- --------
Income (loss) before undistributed net income (loss) of subsidiary (5,439) (892) 922
Undistributed net income (loss) of subsidiary ..................... 5,239 (3,836) 8,972
--------- ---------- --------
Net income (loss) ................................................. $ (200) $(4,728) $9,894
========= ========== ========
</TABLE>
F-108
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
--------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................. $ (200) $ (4,728) $ 9,894
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Undistributed net (income) loss of subsidiary ................ (5,239) 3,836 (8,972)
Amortization of organization expense ......................... -- -- 42
Income tax benefit ........................................... (2,577) (605) (79)
Net change in other assets/liabilities ....................... 2,401 705 378
--------- ---------- ---------
Net cash provided by (used in) operating activities ........... (5,615) (792) 1,263
--------- ---------- ---------
Cash flows from investing activities:
Maturities of investment securities ........................... -- -- 13,270
Purchases of investment securities ............................ -- -- (6,040)
Note receivable from subsidiary ............................... 12,400 (16,800) (7,370)
Capital contributions to subsidiary ........................... (5,000) (30,000) --
Other, net .................................................... (54) -- (106)
--------- ---------- ---------
Net cash provided by (used in) investing activities ........... 7,346 (46,800) (246)
--------- ---------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock ........................ 376 404 488
Proceeds from issuance of senior notes ........................ -- 49,158 --
Payment of dividends .......................................... (2,042) (2,192) (1,166)
--------- ---------- ---------
Net cash provided by (used in) financing activities ........... (1,666) 47,370 (678)
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents .......... 65 (222) 339
Cash and cash equivalents at Beginning of Year ................. 19 391 52
--------- ---------- ---------
Cash and cash equivalents at End of Year ....................... $ 234 $ 169 $ 391
========= ========== =========
</TABLE>
NOTE 14 -- PENSION PLANS AND OTHER RETIREMENT BENEFITS
PENSION PLANS
The Association has five noncontributory pension plans: A qualifying
defined benefit plan covering substantially all employees over the age of 21
who meet minimum service requirements, and four nonqualifying supplemental
plans to provide eligible plan members benefits, based on compensation and
length of service, greater than permitted by the terms of the qualified plan.
Assets of the qualified plan are maintained by a trustee and administered by
the Association's advisory committee. Such assets consist primarily of money
market funds, government securities, corporate bonds and common stocks. The
nonqualifying plans have no assets. The Association has voluntary agreed to
make contributions to each Plan sufficient to provide for the payment of
pension benefits to Plan participants.
During the third quarter of 1995, SFFed recorded an approximate $1.7
million reduction of retirement plan expenses reflecting a net curtailment
gain arising from the suspension of SFFed's defined benefit retirement plan.
The gain is net of the costs of enhancing certain retirement benefits under
that plan immediately before it was suspended and net of certain other costs
associated primarily with enhancing benefits provided under SFFed's defined
contribution (401(k)) plan. During the fourth quarter of 1995, SFFed recorded
an approximate $1.4 million increase in retirement plan expenses arising from
the suspension of SFFed's nonqualified supplemental retirement plans related
to the anticipated acquisition of SFFed as discussed in Note 2.
F-109
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic pension cost and its components are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits earned ........ $ 875 $ 1,897 $ 1,810
Interest on projected benefit obligation 2,814 2,756 2,410
Return on plan assets ................... (1,887) (1,531) (1,640)
Other components -- net ................. 280 819 602
Curtailment gain -- qualified plan ..... (1,689) -- --
Curtailment loss -- unqualified plans .. 1,406 -- --
--------- --------- ---------
Net periodic pension cost ............... $ 1,799 $ 3,941 $ 3,182
========= ========= =========
Assumptions used were as follows:
Discount rate ........................... 7.25% 8.00% 6.50%
Rate of increase in compensation levels.. 5.00 5.00 5.00
Expected long-term rate of return
on assets (1) .......................... 8.00 8.00 8.50
</TABLE>
F-110
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows the funded status and amounts recognized in the
Consolidated Statements of Financial Condition:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
----------
(IN THOUSANDS)
<S> <C> <C>
QUALIFIED PLAN -- ASSETS LESS THAN ACCUMULATED BENEFITS
Actuarial present value of benefit obligations:
Vested benefits ........................................ $ 31,022 $ 23,257
Nonvested benefits ..................................... 543 734
---------- ----------
Accumulated benefit obligation ........................ $ 31,565 $ 23,991
========== ==========
Projected benefit obligation for service rendered to
date ................................................... $ 31,565 $ 28,627
Plan assets at fair value ............................... (28,098) (21,787)
---------- ----------
Plan assets less than projected benefit obligation ..... 3,467 6,840
Unrecognized net loss from past experience different
from that assumed ...................................... (928) (1,520)
Unrecognized net asset being recognized over 13 years .. 437 546
Unrecognized prior service cost ......................... -- (680)
Adjustment required to recognize minimum liability ..... 491 --
---------- ----------
Accrued pension cost (included in "Other Liabilities") . $ 3,467 $ 5,186
========== ==========
NONQUALIFIED PLANS -- ACCUMULATED BENEFITS EXCEED ASSETS
Actuarial present value of benefit obligations:
Vested benefits ........................................ $ 7,171 $ 5,847
Nonvested benefits ..................................... -- 7
---------- ----------
Accumulated benefit obligation ........................ $ 7,171 $ 5,854
==========
Projected benefit obligation for service rendered to
date ................................................... $ 7,171 $ 7,678
Plan assets at fair value ............................... -- --
---------- ----------
Plan assets less than projected benefit obligation ..... 7,171 7,678
Unrecognized net loss from past experience different
from that assumed ...................................... (1,069) (1,668)
Unrecognized net obligation being recognized over 15
years .................................................. (202)
Unrecognized prior service cost ......................... (667)
Adjustment required to recognize minimum liability ..... 1,069 916
---------- ----------
Accrued pension cost (included in "Other Liabilities") . $ 7,171 $ 6,057
========== ==========
</TABLE>
In accordance with the provisions of Statement of Financial Accounting
Standards No. 87 (SFAS 87), Employer's Accounting for Pensions, SFFed has
recognized an additional pension liability of $570,000 and $885,000 in 1995
and 1994, respectively, representing the excess of the accumulated benefit
obligation over the fair value of pension plan assets and accrued pension
liability. As required by SFAS 87, in 1995, this liability, net of an income
tax benefit of $242,000, has been reflected as a $328,000 reduction of
stockholders' equity and in 1994, this liability, net of an income tax
benefit of $376,000, has been established by a $509,000 reduction of
stockholders' equity. This additional liability is a result of a change in
the discount rate used in the measurement of pension plan benefits and a
reduction in the expected long-term rate of return on pension plan assets.
F-111
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER POSTRETIREMENT BENEFITS
Effective January 1, 1993, SFFed adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 106 (SFAS
106) Employers' Accounting for Postretirement Benefits Other than Pensions.
Under SFAS 106, the cost of postretirement benefits other than pensions (e.g.
health care) must be recognized on an accrual basis as employees perform
services to earn the benefits. Many of the provisions and concepts of SFAS
106 are similar to current standards on accounting for pensions. Based on the
transition provisions of SFAS 106, the accumulated postretirement benefit
obligation at the date of adoption (the transition obligation) may be
recognized in income as the cumulative effect of an accounting change in the
period of adoption or delayed and amortized over future periods as a
component of net periodic postretirements cost. The transition obligation at
January 1, 1993 has been estimated at $4.0 million, which SFFed is amortizing
to expense over 20 years as permitted by SFAS 106. SFFed has estimated that
accounting for covered benefits on an accrual basis, as required by SFAS 106,
rather than the pay-as-you-go method previously used by SFFed, increased
expense for 1993 by approximately $0.4 million. During the fourth quarter of
1995, SFFed recorded an approximate $1.9 million increase in retirement
medical benefits expenses resulting from the curtailment of the plan due to
the anticipated acquisition of SFFed, as discussed in Note 2.
NOTE 15 -- EMPLOYEE INCENTIVE AND COMPENSATION PLANS
SFFed's Stock Incentive Plan, which was amended in 1994 to increase the
number of shares reserved thereunder for issuance by 500,000 shares, provides
for up to 1,271,500 shares of common stock to be issued to directors and key
employees of SFFed and its subsidiaries. Directors of SFFed are granted
options for 10,000 shares of common stock upon their initial election to the
Board of Directors. The Plan provides that stock options may be either
incentive stock options (ISO), as defined by Section 422 of the Internal
Revenue Code, or nonstatutory options which do not satisfy the provisions of
Code Section 422. The Plan also provides for the issuance of stock
appreciation rights (SAR) and restricted stock.
ISOs may be granted at an option price not less than fair market value as
of the date of grant and nonstatutory options at a price determined by the
Stock Option Committee provided for in the Plan. Stock options may be
exercised with cash, shares of SFFed's common stock, or a combination of cash
and common stock equal to the option price.
In 1990 a stock option plan for non-employee directors (Directors' Plan)
was established to allow those directors the choice of receiving nonstatutory
options in lieu of their annual retainer fees. In 1994 the Directors' Plan
was amended permitting participants to elect to receive nonstatutory options
in lieu of their attendance fees as well as retainer fees. In addition, the
Directors' Plan was further amended to provide an option pricing model
generally accepted by the financial community as reflective of the fair
market value of the interest received by the Directors in exchange for the
cash compensation. The exercise price of options granted under this plan is
$1.00 per share. The maximum number of shares of common stock which may be
issued under the Directors' Plan is 200,000 shares, provided that the
aggregate number of shares of common stock issuable under this plan and
SFFed's Stock Incentive Plan shall not exceed 1,271,500 shares.
SARs are only granted in conjunction with all or any part of any stock
option granted under the Plan. A SAR entitles the holder to receive cash,
shares of SFFed's common stock or a combination thereof, at the discretion of
SFFed, equal to the excess of the fair market value at the date of exercise
over the option price of the related stock option. Exercise of a SAR cancels
the related stock option.
During 1992 certain key employees agreed to convert their existing SARs
for limited stock appreciation rights (LSAR). LSARs are subject to the same
terms and conditions as SARs but are exercisable only if there is a change of
control of SFFed.
F-112
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Restricted stock is subject to such restrictions against sale, transfer
or other disposition, as may be determined at the time of making the award.
Employees forfeit all shares of restricted stock if they leave the employ of
SFFed and its subsidiaries prior to the lapse of restrictions.
All nonstatutory options and related SARs granted may be exercised prior
to a dissolution or liquidation of SFFed or a sale of substantially all the
assets of SFFed or a merger or consolidation in which SFFed is not the
surviving entity.
No ISOs have been granted through December 31, 1995. Nonstatutory options,
restricted stock, SARs and LSARs granted, exercised or terminated are
summarized as follows:
<TABLE>
<CAPTION>
TOTAL RESTRICTED
SHARES STOCK OPTIONS
---------- ------------ ----------
<S> <C> <C> <C>
Outstanding at December 31, 1992 ... 594,453 6,603 587,850
Granted ............................ 6,096 -- 6,096
Exercised .......................... (49,915) -- (49,915)
Restrictions lapsed ................ (2,996) (2,996) --
Terminated/cancelled ............... (44,780) -- (44,780)
---------- ------------ ----------
Outstanding at December 31, 1993 ... 502,858 3,607 499,251
Granted ............................ 103,146 -- 103,146
Exercised .......................... (33,379) -- (33,379)
Restrictions lapsed ................ (2,691) (2,691) --
Terminated/cancelled ............... (6,118) -- (6,118)
---------- ------------ ----------
Outstanding at December 31, 1994 (2) 563,816 916 562,900
Granted ............................ 117,508 20,000 97,508
Exercised .......................... (29,965) -- (29,965)
Restrictions lapsed ................ (916) (916) --
Terminated/cancelled ............... (1,264) -- (1,264)
---------- ------------ ----------
Outstanding at December 31, 1995 (2) 649,179 20,000 629,179
========== ============ ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRICE PER
SARS (1) LSARS SHARE
---------- ---------- -------------
<S> <C> <C> <C>
Outstanding at December 31, 1992 ... 61,143 272,536
Granted ............................ -- -- $ 1.00
Exercised .......................... (24,826) -- 6.38-17.00
Restrictions lapsed ................ -- -- 11.25-14.13
Terminated/cancelled ............... (18,037) -- 6.38-17.00
---------- ---------- -------------
Outstanding at December 31, 1993 ... 18,280 272,536
Granted ............................ -- 86,550 1.00-18.88
Exercised .......................... (5,918) -- 6.38-17.00
Restrictions lapsed ................ -- -- 11.25-14.13
Terminated/cancelled ............... (1,124) (20,682) 6.38-17.00
---------- ---------- -------------
Outstanding at December 31, 1994 (2) 11,238 338,404
Granted ............................ -- 87,600 1.00-20.25
Exercised .......................... (1,264) -- 6.38-17.00
Restrictions lapsed ................ -- -- 11.25
Terminated/cancelled ............... (511) (9,000) 6.38-17.00
---------- ---------- -------------
Outstanding at December 31, 1995 (2) 9,463 417,004
========== ==========
</TABLE>
- ------------
(1) All SARs are related to options. The exercise of SARs results in a
surrender of the related option.
(2) Options and SARs exercisable at December 31, 1995 were 444,177 and
9,463, respectively.
The number of shares available for future options was 393,045 and 510,533
at December 31, 1995 and 1994, respectively. See Note 2 regarding the
treatment of options in connection with the acquisition of SFFed by First
Nationwide.
Incentive Plans are maintained to provide a means of awarding incentive
compensation to most officers and employees, including loan agents. The Plans
are nonqualified plans and all disbursements are paid from the general assets
of SFFed. For the years ended December 31, 1995, 1994 and 1993 SFFed's
expense under these plans amounted to approximately $183,000, $422,000 and
$1,726,000, respectively. SFFed maintains a savings plan for its employees
and the employees of its subsidiaries. The plan allows participants to make
contributions by salary deductions equal to 15% or less of their salary
pursuant to Section 401(k) of the Internal Revenue Code. Employee
contributions are matched by SFFed at the rate of 50% of such contributions
up to 2% of the employee's salary. SFFed's matching contributions, under the
terms of the plan, must be used to purchase SFFed's common stock. SFFed
contributions to the plan amounted to $413,000, $347,000 and $316,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
F-113
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of SFFed's financial
instruments is in accordance with the provisions of Statement of Financial
Accounting Standards No. 107 (SFAS 107) Disclosures about Fair Value of
Financial Instruments. The valuation methods used by SFFed are set forth
below.
The accuracy and usefulness of the fair value information disclosed herein
is limited by the following factors.
o Because no market exists for a significant portion of SFFed's
financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in these
assumptions could significantly affect the estimates.
o These estimates do not reflect any premium or discount that could
result from offering for sale at one time SFFed's entire holding of
a particular financial asset.
o SFAS 107 excludes from its disclosure requirements certain financial
instruments and various significant assets and liabilities that are
not considered to be financial instruments.
Because of these and other limitations, the aggregate fair value amounts
presented in the following table do not represent the underlying value of
SFFed.
The carrying amounts and the estimated fair values of SFFed's financial
instruments at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents .............. $ 195,251 $ 195,251 $ 165,206 $ 165,206
Federal Home Loan Bank stock ........... 31,579 31,579 30,049 30,049
Mortgage-backed securities ............. 932,398 945,319 408,036 400,715
Loans held for sale .................... 4,393 4,393 3,627 3,627
Loans receivable held for investment .. 2,714,988 2,708,195 3,011,504 2,942,263
Excess servicing ....................... 2,348 25,825 2,803 14,175
LIABILITIES
Demand deposits ........................ 852,715 852,715 566,403 566,403
Certificate accounts ................... 1,840,528 1,852,308 1,915,585 1,899,119
Borrowings ............................. 1,041,559 1,049,860 1,012,820 1,006,902
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to originate loans and
related hedging program (unrealized
gain) ................................. -- 46 -- 371
</TABLE>
The following methods and assumptions were used by SFFed in computing the
estimated fair values in the above table:
Cash and Cash Equivalents and Federal Home Loan Bank Stock and Demand
Deposits: The carrying amounts of these financial instruments approximate
their fair values.
Mortgage-Backed Securities: Fair values of these securities are based on
year-end quoted market prices.
F-114
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loans Held for Sale: The fair value of these loans has been based on
market prices of similar loans traded in the secondary market.
Loans Receivable Held for Investment: For fair value estimation purposes,
these loans have been categorized by type of loan (e.g., one-to-four unit
residential) and then further segmented between adjustable or fixed rates and
performing or nonperforming. Where possible, the fair value of these groups
of loans has been based on secondary market prices for loans with similar
characteristics. The fair value of the remaining loans has been estimated by
discounting the future cash flows using current interest rates being offered
for loans with similar terms to borrowers of similar credit quality.
Excess Servicing (Deferred Premium on Sales and Securitization of
Loans): Fair value of this asset has been estimated by reference to market
loan prepayment assumptions and interest rates for similar pools of loans.
Certificate Accounts and Borrowings: Fair values have been estimated using
projected cash flows discounted at replacement rates offered at each year end
for instruments of similar remaining maturities.
Commitments to Originate Loans and Related Hedging Program: The fair value
of the amount of commitments to originate loans considered likely to fund has
been estimated based on current secondary market prices for similar loans. No
loans were being originated for sale at December 31, 1995 and 1994.
The fair value estimates disclosed above were based on market prices and
other available information at year-end 1995 and 1994, respectively. No
detailed valuation has been performed since December 31, 1995 and, although
SFFed is not aware of any changes that could significantly impact these
estimates, current fair value estimates could be materially different from
the year-end 1995 amounts presented above.
NOTE 17 -- COMMITMENTS AND CONTINGENCIES
Outstanding commitments relating to loans and MBS are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Commitments to originate loans ..... $31,341 $ 76,928
Commitments to sell loans ........... 1,014 1,423
Commitments to convert loans to MBS -- 199,784
Commitments to purchase MBS ......... -- 100,000
Forward commitments to sell loans .. 4,500 --
</TABLE>
At December 31, 1995 SFFed's commitments to originate loans included
$10,977,000 of fixed-rate loans at interest rates ranging from 6.38% to
7.88%, and were outstanding for no more than 30 days.
SFFed on occasion has securitized (received MBS for loans) and sold loans
with recourse provisions. In 1995, SFFed did not have any sales of loans or
MBS with recourse. The principal balance of loans that have been securitized
or sold with recourse at December 31, 1995 and 1994 were $478,348,000 and
$11,796,000, respectively.
As part of the normal course of business, SFFed has entered into forward
transactions in order to reduce its exposure to fluctuations in interest
rates associated with originating loans for sale. At December 31, 1995
forward commitments to sell loans was $4,500,000.
LITIGATION
SFFed is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, after
consultations with counsel, the ultimate disposition of these matters will
not have a materially adverse effect on SFFed's consolidated financial
position or results of operations.
F-115
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEASE COMMITMENTS
Certain branches and offices are leased by SFFed under the terms of
operating leases expiring at various dates through the year 2029. Lease
rental expense amounted to $7,223,000, $7,173,000 and $8,009,000 for the
years ended December 31, 1995, 1994 and 1993, respectively. Future
approximate minimum lease payments under the terms of the existing operating
leases are as follows:
<TABLE>
<CAPTION>
OFFICE AND
NET SUBLEASES EQUIPMENT
--------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Year ending December 31:
1996 ................... $ 6,966 $ 514 $ 7,480
1997 ................... 6,778 414 7,192
1998 ................... 5,677 382 6,059
1999 ................... 5,287 240 5,527
2000 ................... 5,032 99 5,131
Thereafter ............. 6,067 297 6,364
--------- ----------- ------------
$35,807 $1,946 $37,753
========= =========== ============
</TABLE>
Legislation is currently pending in Congress which would recapitalize the
Savings Association Insurance Fund ("SAIF") in order to bring it into parity
with the FDIC's other insurance fund, the Bank Insurance Fund ("BIF"). The
legislation would require an assessment of all SAIF-insured institutions of
approximately 0.85% to 0.90% of their March 31, 1995 customer deposit
balances. If such legislation had been enacted by law by December 31, 1995,
the Association would have been assessed approximately $23,100,000 to
$24,400,000, on a pre-tax basis. After paying the one-time assessment, it
would be expected that SFFed would pay significantly reduced insurance
premiums on its customer deposits. SFFed is unable to predict whether such
legislation will be enacted.
F-116
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data gives effect to the
Acquisitions, the Branch Sales and the Offering. The Branch Purchases
consummated in 1995 and the proposed Home Federal Acquisition have not been
reflected in the pro forma financial data because such transactions are not
material either individually or in the aggregate.
The following pro forma condensed combined statement of financial
condition at December 31, 1995, is based on the historical consolidated
statement of financial condition of the Issuer giving pro forma effect to the
SFFed Acquisition, the LMUSA 1996 Purchase, the Branch Sales and the Offering
as if such transactions had occurred on December 31, 1995. The pro forma
condensed combined statement of operations for the year ended December 31,
1995, is based on the historical consolidated statement of operations for the
year ended December 31, 1995 giving pro forma effect to the Acquisitions, the
Branch Sales and the Offering as if such transactions occurred on January 1,
1995. The pro forma adjustments are based on available information and upon
certain assumptions that management believes are reasonable under the
circumstances. The Acquisitions are accounted for under the purchase method
of accounting. Under this method of accounting, the purchase price has been
allocated to the assets and liabilities acquired based on preliminary
estimates of fair value. The actual fair value is determined as of the
consummation of each of the Acquisitions. The unaudited pro forma financial
data do not necessarily reflect the results of operations or the financial
position of the Issuer that actually would have resulted had the
Acquisitions, the Branch Sales and the Offering occurred at the dates
indicated, or project the results of operations or financial position of the
Issuer for any future date or period.
The following unaudited pro forma financial data should be read in
conjunction with the Consolidated Financial Statements of the Issuer and the
notes thereto, the Consolidated Financial Statements of the FNB Acquired
Business and the notes thereto, and the Consolidated Financial Statements of
SFFed and the notes thereto, contained elsewhere in this Prospectus.
Capitalized terms used and not defined herein have the meanings set forth in
the Prospectus.
P-1
<PAGE>
THE ISSUER
PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
LMUSA 1996
ISSUER SFFED PRO PURCHASE PRO PRO FORMA
HISTORICAL FORMA(A) FORMA(B) BRANCH SALES(C) OFFERING(D) COMBINED
------------- ------------ ------------ --------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ................. $ 312,571 $ (76,881) $ -- $ (22,649)(1) $133,000(4) $ 346,041
Securities ................................ 350,016 -- -- -- -- 350,016
Mortgage-backed securities ................ 3,002,002 942,313 -- -- -- 3,944,315
Loans receivable, net ..................... 10,034,430 2,695,966 176 (5,785)(1) -- 12,724,787
Covered assets, net ....................... 39,349 -- -- -- -- 39,349
Office premises and equipment, net ....... 93,509 13,055 -- (30,906)(1) -- 75,658
Mortgage servicing rights, net ............ 241,355 16,000 105,859 -- -- 363,214
Core deposit and other intangible assets . 18,606 116,742 -- (1,029)(1) -- 134,319
Other assets .............................. 554,407 112,323 62,367 -- 7,000(4) 736,097
------------- ------------ ------------ --------------- ------------- -----------
Total assets .............................. $14,646,245 $3,819,518 $ 168,402 $ (60,369) $140,000 $18,713,796
============= ============ ============ =============== ============= ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits .................................. $10,241,628 $2,704,193 $ 341,360 $(4,695,622)(1) -- $ 8,591,559
Borrowings ................................ 3,362,372 1,054,028 (291,610) 4,268,978 (2) $140,000(4) 8,533,768
Other liabilities ......................... 279,099 61,297 118,652 29,302 (3) -- 488,350
------------- ------------ ------------ --------------- ------------- -----------
Total liabilities ......................... 13,883,099 3,819,518 168,402 (397,342) 140,000 17,613,677
------------- ------------ ------------ --------------- ------------- -----------
Minority interest--preferred stock of
First Nationwide Bank .................... 300,730 -- -- -- -- 300,730
Stockholders' equity ...................... 462,416 -- -- 336,973 (3) -- 799,389
------------- ------------ ------------ --------------- ------------- -----------
Total liabilities and stockholders' equity $14,646,245 $3,819,518 $ 168,402 $ (60,369) $140,000 $18,713,796
============= ============ ============ =============== ============= ===========
</TABLE>
- ------------
(a) Represents the pro forma effect of the SFFed Acquisition. See details
on P-4.
(b) Represents the pro forma effect of the LMUSA 1996 Purchase. See details
on P-7.
(c) Represents adjustments to record the impact of the Branch Sales.
(d) Represents adjustments to record the issuance of the Notes.
<TABLE>
<CAPTION>
DOLLAR
AMOUNT PERCENT
------------ ---------
<S> <C> <C>
Pro Forma Regulatory Capital Ratios of the Bank:
Tangible capital .............................. $1,186,474 6.30%
Core capital .................................. 1,186,474 6.30%
Risk-based capital:
Core capital ................................ 1,186,474 10.16%
Total capital ............................... 1,419,810 12.15%
</TABLE>
The amount of adjusted total assets used for the tangible and core capital
ratios was approximately $18.8 billion. Risk-weighted assets used for the
risk-based core and total capital ratios amounted to approximately $11.7
billion.
Under proposed congressional legislation relative to the recapitalization
of the SAIF, a special assessment could be levied against SAIF-insured
deposits, which is currently estimated to range from 85 to 90 basis points.
The impact of such assessment (at 90 basis points) on the pro forma condensed
combined statement of financial condition as of December 31, 1995 would be to
(i) increase other liabilities by approximately $69 million and (ii) reduce
stockholders' equity by approximately $69 million. See
"Regulation--Regulation of Federal Savings Banks--FDIC Assessments."
The Bank intends to maintain its "well capitalized" status (generally,
core capital of at least 5% and total risk-based capital of at least 10%) and
to distribute amounts in excess of such levels as dividends to the Issuer,
subject to regulatory limitations and the terms of the Indenture and the
Senior Notes Indenture. While maintaining First Nationwide Bank's regulatory
capital at the "well capitalized" level and considering the aforementioned
impact of the SAIF assessment, the amount of the Bank's capital that would be
available for distribution as common dividends to the Issuer in the first
quarter of 1996 would approximate $177 million. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Capital
Resources."
P-2
<PAGE>
THE ISSUER
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(1) The following represents adjustments necessary to record the Branch
Sales:
<TABLE>
<CAPTION>
CARRYING VALUE AS OF DECEMBER 31, 1995
-----------------------------------------------------------
OHIO MICHIGAN NORTHEAST TOTAL
-------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Cash and cash equivalents .................. $ 9,195 $ 4,355 $ 9,099 $ 22,649
Loans receivable ............................ 1,045 597 4,143 5,785
Office premises and equipment ............... 8,240 7,715 14,951 30,906
Deposits .................................... (1,414,695) (783,965) (2,496,962) (4,695,622)
Core deposit intangible asset ............... (865) 1,229 665 1,029
-------------- ------------ -------------- -------------
Net carrying value of assets and liabilities
sold ....................................... $(1,397,080) $(770,069) $(2,468,104) $(4,635,253)
============== ============ ============== =============
</TABLE>
(2) Represents borrowings necessary to fund the Branch Sales, computed as
follows:
<TABLE>
<CAPTION>
OHIO MICHIGAN NORTHEAST TOTAL
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net carrying value of assets and liabilities
sold ...................................... $1,397,080 $770,069 $2,468,104 $4,635,253
Gain on sale--see note 3 .................... 129,602 55,060 181,613 366,275
------------ ---------- ------------ ------------
Borrowings ................................ $1,267,478 $715,009 $2,286,491 $4,268,978
============ ========== ============ ============
</TABLE>
(3) Represents pro forma gain on sale of the Branch Sales, computed as
follows:
<TABLE>
<CAPTION>
OHIO MICHIGAN NORTHEAST TOTAL
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Deposit totals at December 31, 1995 $1,414,695 $783,965 $2,496,962 $4,695,622
Premium per contract ............... 9.10% 7.18% 7.30% 7.82%
------------ ---------- ------------ ------------
Total premium ................... 128,737 56,289 182,278 367,304
Core deposit intangible asset .. 865 (1,229) (665) (1,029)
------------ ---------- ------------ ------------
Gain on sale of deposits (a) ... 129,602 55,060 181,613 366,275
Tax effect (other liabilities) . (10,368) (4,405) (14,529) (29,302)
------------ ---------- ------------ ------------
Net gain .................... $ 119,234 $ 50,655 $ 167,084 $ 336,973
============ ========== ============ ============
</TABLE>
(a) The remaining assets and liabilities will be sold at their respective
carrying values, resulting in no gain or loss.
(4) Represents the issuance of the Notes:
<TABLE>
<CAPTION>
<S> <C>
Proceeds from the issuance of the Notes $140,000
Less: deferred issuance costs .......... 7,000
----------
Net proceeds ....................... $133,000
==========
</TABLE>
P-3
<PAGE>
THE ISSUER
PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1995
(IN THOUSANDS)
SFFED ACQUISITION
<TABLE>
<CAPTION>
SFFED VALUATION PRO FORMA SFFED PRO
HISTORICAL(A) ADJUSTMENTS(B) ADJUSTMENTS(C) FORMA
------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ................. $ 195,251 $ -- $(272,132)(2) $ (76,881)
Securities ................................ -- -- -- --
Mortgage-backed securities ................ 932,398 9,915 (1) -- 942,313
Loans receivable, net ..................... 2,719,381 (23,415)(1) -- 2,695,966
Covered assets, net ....................... -- -- -- --
Office premises and equipment, net ....... 21,899 (8,844)(1) -- 13,055
Mortgage servicing rights, net ............ 2,183 13,817 (1) -- 16,000
Core deposit and other intangible assets . 8,053 (8,054)(1) 91,043 (1) 116,742
25,700 (1)
Other assets .............................. 112,323 -- -- 112,323
------------- -------------- --------------- ------------
Total assets .............................. $3,991,488 $ 9,119 $(181,089) $3,819,518
============= ============== =============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits .................................. $2,693,243 $ 10,950 (1) $ -- $2,704,193
Borrowings ................................ 1,041,558 12,470 (1) -- 1,054,028
Other liabilities ......................... 61,297 -- -- 61,297
------------- -------------- --------------- ------------
Total liabilities ......................... 3,796,098 23,420 -- 3,819,518
------------- -------------- --------------- ------------
Minority interest ......................... -- -- -- --
Stockholders' equity ...................... 195,390 (14,301)(1) (181,089)(3) --
------------- -------------- --------------- ------------
Total liabilities and stockholders' equity $3,991,488 $ 9,119 $(181,089) $3,819,518
============= ============== =============== ============
</TABLE>
- ------------
(a) Represents historical amounts obtained from SFFed's audited financial
statements.
(b) Represents adjustments to record (i) SFFed's assets and liabilities at
preliminary estimates of their respective fair values and (ii) the
elimination of historical goodwill.
(c) Represents adjustments to record (i) the purchase price of the SFFed
Acquisition and (ii) the elimination of the equity of SFFed.
P-4
<PAGE>
THE ISSUER
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
SFFED ACQUISITION
(1) The SFFed Acquisition will be accounted for using the purchase method of
accounting. The total purchase cost will be allocated first to the tangible
and identifiable intangible assets and liabilities of SFFed based on their
respective fair values and the remainder will be allocated to goodwill. The
aggregate purchase price was determined as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchase price, as defined:
Shares outstanding at December 31, 1995 ........ 7,883,247
Options outstanding at December 31, 1995 ....... 553,304
-----------
Total ........................................ 8,436,551
Purchase price per share ........................ $ 32.00
-----------
$ 269,969
Exercise of options outstanding (a) ............. (7,425)
-----------
Purchase price .................................. 262,544
Acquisition fees and expenses ................... 15,000
Acquisition fees and expenses included in equity
of SFFed ....................................... (5,412)
-----------
Total ........................................ $ 272,132
===========
</TABLE>
The following is a reconciliation of the equity of SFFed to the fair
value of the net assets to be acquired by the Bank:
<TABLE>
<CAPTION>
<S> <C> <C>
Equity of SFFed at December 31, 1995 ............. $195,390
Fair value adjustments (b):
Mortgage-backed securities ...................... $ 9,915
Loans receivable, net ........................... (23,415)
Office premises and equipment, net .............. (8,844)
Mortgage servicing rights ....................... 13,817
Core deposit intangible asset ................... 25,700
Deposit accounts ................................ (10,950)
Borrowings ...................................... (12,470)
Historical goodwill ............................. (8,054)
---------- ----------
(14,301) (14,301)
----------
Fair value of net assets acquired ............... 181,089
Purchase cost ................................... 272,132
----------
Excess of purchase cost over net assets acquired
("goodwill") ................................... $ 91,043
==========
</TABLE>
P-5
<PAGE>
THE ISSUER
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
SFFED ACQUISITION (CONTINUED)
(a) Represents cash to be received by SFFed in settlement of stock
options and stock appreciation rights outstanding as of December 31, 1995
(553,304 options outstanding at an average price of $13.42 per share).
(b) Fair value adjustments are amortized against (accreted to) net
income as follows:
<TABLE>
<CAPTION>
PERIOD OF AMORTIZATION
ITEM METHOD OF AMORTIZATION (ACCRETION) (ACCRETION)
- --------------------------------- ------------------------------------------------ --------------------------
<S> <C> <C>
Mortgage-backed securities Level yield method over effective terms of such
assets, considering estimated prepayments 6 to 9 years
Loans receivable Level yield method over effective terms of such
assets, considering estimated prepayments 2 to 12 years
Mortgage servicing rights Level yield method over effective terms of such
assets, considering estimated prepayments 2 to 7 years
Core deposit intangible asset Method based on the estimated lives of existing
depositor relationships 7 to 10 years
Deposit accounts Level yield method over stated terms of such
liabilities 1 to 5 years
Borrowings Level yield method over stated terms of such
liabilities 1 to 5 years
</TABLE>
(2) Represents payment by the Bank in connection with the SFFed Acquisition.
The purchase price will be paid from existing cash of SFFed and the Issuer.
(3) Represents the elimination of the equity of SFFed of $181,089.
P-6
<PAGE>
THE ISSUER
PRO FORMA CONDENSED COMBINED STATEMENT OF
ASSETS ACQUIRED AND LIABILITIES ASSUMED
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
LMUSA 1996 LMUSA 1996
PURCHASE VALUATION PRO FORMA PURCHASES
LMUSA 1996 PURCHASE HISTORICAL(A) ADJUSTMENTS(B) ADJUSTMENTS(C) PRO FORMA
- ------------------------------------------ ------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
ASSETS ACQUIRED
Cash and cash equivalents ................. $ -- $ -- $ 341,360(2) $ --
(291,610)(2)
(49,750)(3)
Securities ................................ -- -- -- --
Mortgage-backed securities ................ -- -- -- --
Loans receivable, net ..................... 176 -- -- 176
Covered assets, net ....................... -- -- -- --
Office premises and equipment, net ....... -- -- -- --
Mortgage servicing rights, net ............ 89,902 15,957(1) -- 105,859
Core deposit and other intangible assets . -- -- -- --
Other assets .............................. 62,367 -- -- 62,367
------------- -------------- -------------- -----------
Total assets .............................. $152,445 $15,957 $ -- $ 168,402
============= ============== ============== ===========
LIABILITIES ASSUMED
Deposits .................................. $ $ -- $ 341,360 (2) $ 341,360
Borrowings ................................ -- -- (291,610)(2) (291,610)
Other liabilities ......................... 2,874 -- 107,778 (3) 118,652
8,000 (3)
------------- -------------- -------------- -----------
Total liabilities assumed ................. 2,874 -- 165,528 168,402
------------- -------------- -------------- -----------
Minority interest ......................... -- -- -- --
Excess of assets acquired over liabilities
assumed .................................. 149,571 15,957 (1) (165,528)(4) --
------------- -------------- -------------- -----------
Total liabilities and excess of assets
acquired over liabilities assumed ....... $152,445 $15,957 $ -- $ 168,402
============= ============== ============== ===========
</TABLE>
(a) Represents historical balances of the assets acquired and liabilities
assumed obtained from LMUSA's records (unaudited).
(b) Represents adjustments to record (i) the assets acquired and liabilities
assumed at preliminary estimates of their respective fair values and (ii)
acquisition fees and expenses.
(c) Represents adjustment to record (i) the cash paid at closing for the
LMUSA 1996 Purchase, (ii) the impact of the transfer of custodial accounts to
the Bank and (iii) the elimination of the excess of assets acquired over the
liabilities assumed in the LMUSA 1996 Purchase.
P-7
<PAGE>
THE ISSUER
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF
ASSETS ACQUIRED AND LIABILITIES ASSUMED
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
LMUSA 1996 PURCHASE
- -------------------
(1) The LMUSA 1996 Purchase will be accounted for using the purchase method
of accounting. The total purchase cost will be allocated first to the
tangible and identifiable intangible assets based on their respective fair
values and the remainder, if any, will be allocated to goodwill. The
aggregate purchase price was determined as follows:
<TABLE>
<CAPTION>
<S> <C>
Gross Purchase Price ........................... $178,260
Adjustments to gross purchase price, net (i) (20,732)
----------
Purchase cost as of December 31, 1995 ....... 157,528
Acquisition fees and expenses ................ 8,000
----------
Total ....................................... $165,528
==========
</TABLE>
(i) The gross purchase price amounts in the agreement is based on
account and loan portfolio balances as of July 31, 1995 and is adjusted based
on subsequent changes in the balances.
The following is a reconciliation of the excess of the assets acquired
over the liabilities assumed (at LMUSA's historical carrying value) to the
recorded value of the net assets to be acquired by the Bank:
<TABLE>
<CAPTION>
<S> <C>
Excess of assets acquired over liabilities assumed
at December 31, 1995, at LMUSA's historical
carrying value .................................... $149,571
Fair value adjustments--mortgage servicing rights .. 15,957
----------
Recorded value of net assets acquired .............. $165,528
==========
</TABLE>
(2) Represents the balance of funds in custodial accounts maintained by LMUSA
at other banks related to the servicing acquired in the LMUSA 1996 Purchase.
For pro forma purposes, it is assumed that such funds will be transferred to
the Bank and used to pay the amount due at closing and to liquidate
borrowings as follows:
<TABLE>
<CAPTION>
<S> <C>
Total amount of custodial funds transferred $341,360
Less: Cash paid at closing ................. 49,750
----------
Amount applied to reduce borrowings ...... $291,610
==========
</TABLE>
(3) Represents payment by the Bank in connection with the LMUSA 1996
Purchase. The agreement for the LMUSA 1996 Purchase includes an initial cash
payment with deferred payments of the remainder of the contractual purchase
price.
<TABLE>
<CAPTION>
<S> <C>
Total purchase price ............... $165,528
Less: Acquisition fees and expenses 8,000
----------
Purchase cost ...................... $157,528
==========
Deferred payment amount ............ $107,778
Cash paid at closing ............... 49,750
----------
$157,528
==========
</TABLE>
(4) Represents the elimination of the excess of assets acquired over
liabilities assumed totalling $165,528.
P-8
<PAGE>
THE ISSUER
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
SFFED LMUSA
ACQUISITION PURCHASES
ISSUER PRO FORMA PRO FORMA
HISTORICAL TOTALS(A) TOTALS(B)
------------ ------------- -----------
<S> <C> <C> <C>
INTEREST INCOME:
LOANS RECEIVABLE .................................... $ 823,864 $230,713 $22,477
SECURITIES .......................................... 28,396 10,685 --
MORTGAGE-BACKED SECURITIES .......................... 212,880 62,403 --
OTHER INTEREST INCOME ............................... 10,705 -- --
------------ ------------- -----------
TOTAL INTEREST INCOME .............................. 1,075,845 303,801 22,477
INTEREST EXPENSE:
DEPOSITS ............................................ 447,359 143,797 --
BORROWINGS .......................................... 287,456 74,587 2,018
------------ ------------- -----------
TOTAL INTEREST EXPENSE ............................. 734,815 218,384 2,018
------------ ------------- -----------
NET INTEREST INCOME ................................. 341,030 85,417 20,459
PROVISION FOR LOAN LOSSES ........................... 37,000 11,094 --
------------ ------------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 304,030 74,323 20,459
NONINTEREST INCOME:
CUSTOMER BANKING FEES ............................... 47,493 5,291 --
MORTGAGE BANKING OPERATIONS ......................... 70,265 860 76,445
NET GAIN (LOSS) ON SALES OF ASSETS .................. 147 -- (1,851)
OTHER ............................................... 33,068 1,677 2,690
------------ ------------- -----------
TOTAL NONINTEREST INCOME ........................... 150,973 7,828 77,284
NONINTEREST EXPENSE:
COMPENSATION AND BENEFITS ........................... 154,288 11,141 19,500
OTHER ............................................... 178,265 34,896 38,081
------------ ------------- -----------
TOTAL NONINTEREST EXPENSE .......................... 332,553 46,037 57,581
------------ ------------- -----------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY
ITEM AND MINORITY INTEREST ......................... 122,450 36,114 40,162
FEDERAL AND STATE INCOME TAXES ...................... (57,185) 3,554 3,952
------------ ------------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND MINORITY
INTEREST ........................................... 179,635 32,560 36,210
EXTRAORDINARY ITEM--GAIN ON EARLY EXTINGUISHMENT OF
FHLB ADVANCES, NET ................................. 1,967 -- --
------------ ------------- -----------
NET INCOME (LOSS) BEFORE MINORITY INTEREST ......... 181,602 32,560 36,210
MINORITY INTEREST--FIRST NATIONWIDE BANK PREFERRED
STOCK DIVIDENDS .................................... 34,584 -- --
------------ ------------- -----------
NET INCOME (LOSS) ................................... $ 147,018 $ 32,560 $36,210
============ ============= ===========
PRO FORMA SUPPLEMENTAL INFORMATION:
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY
ITEM AND MINORITY INTEREST ......................... $ 122,450 $ 36,114 $40,162
INTEREST AND OTHER EXPENSE ON SENIOR NOTES (E) ..... 25,539 -- --
INTEREST AND OTHER EXPENSE ON NOTE (E) .............. -- -- --
------------ ------------- -----------
TOTAL (F) ......................................... $ 147,989 $ 36,114 $40,162
============ ============= ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
BRANCH SALES
PRO FORMA PRO FORMA PRO FORMA
TOTALS(C) ADJUSTMENTS(D) COMBINED
-------------- -------------- ------------
<S> <C> <C> <C>
INTEREST INCOME:
LOANS RECEIVABLE .................................... $ (623) $ -- $1,076,431
SECURITIES .......................................... -- -- 39,081
MORTGAGE-BACKED SECURITIES .......................... -- -- 275,283
OTHER INTEREST INCOME ............................... -- -- 10,705
-------------- -------------- ------------
TOTAL INTEREST INCOME .............................. (623) -- 1,401,500
INTEREST EXPENSE:
DEPOSITS ............................................ (211,530) -- 379,626
BORROWINGS .......................................... 280,671 12,775 (1) 657,507
-------------- -------------- ------------
TOTAL INTEREST EXPENSE ............................. 69,141 12,775 1,037,133
-------------- -------------- ------------
NET INTEREST INCOME ................................. (69,764) (12,775) 364,367
PROVISION FOR LOAN LOSSES ........................... -- -- 48,094
-------------- -------------- ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES (69,764) (12,775) 316,273
NONINTEREST INCOME:
CUSTOMER BANKING FEES ............................... (22,228) -- 30,556
MORTGAGE BANKING OPERATIONS ......................... -- -- 147,570
NET GAIN (LOSS) ON SALES OF ASSETS .................. -- -- (1,704)
OTHER ............................................... (789) -- 36,646
-------------- -------------- ------------
TOTAL NONINTEREST INCOME ........................... (23,017) -- 213,068
NONINTEREST EXPENSE:
COMPENSATION AND BENEFITS ........................... (19,476) -- 165,453
OTHER ............................................... (25,823) 1,000 (2) 226,419
-------------- -------------- ------------
TOTAL NONINTEREST EXPENSE .......................... (45,299) 1,000 391,872
-------------- -------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY
ITEM AND MINORITY INTEREST ......................... (47,482) (13,775) 137,469
FEDERAL AND STATE INCOME TAXES ...................... (4,671) (1,355)(3) (55,705)
-------------- -------------- ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND MINORITY
INTEREST ........................................... (42,811) (12,420) 193,174
EXTRAORDINARY ITEM--GAIN ON EARLY EXTINGUISHMENT OF
FHLB ADVANCES, NET ................................. -- -- 1,967
-------------- -------------- ------------
NET INCOME (LOSS) BEFORE MINORITY INTEREST ......... (42,811) (12,420) 195,141
MINORITY INTEREST--FIRST NATIONWIDE BANK PREFERRED
STOCK DIVIDENDS .................................... -- -- 34,584
-------------- -------------- ------------
NET INCOME (LOSS) ................................... $ (42,811) $ (12,420) $ 160,557
============== ============== ============
PRO FORMA SUPPLEMENTAL INFORMATION:
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY
ITEM AND MINORITY INTEREST ......................... $ (47,482) $ (13,775) $ 137,469
INTEREST AND OTHER EXPENSE ON SENIOR NOTES (E) ..... -- -- 25,539
INTEREST AND OTHER EXPENSE ON NOTE (E) .............. -- 13,775 13,775
-------------- -------------- ------------
TOTAL (F) ......................................... $ (47,482) $ -- $ 176,783
============== ============== ============
</TABLE>
- ------------
(a) Represents pro forma results of operations related to the SFFed
Acquisition. See details on P-11.
(b) Represents pro forma results of operations related to the LMUSA
Purchases. See details on P-14.
(c) Represents pro forma results of operations related to the Branch Sales.
See details on P-16.
(d) Represents adjustments to reflect (i) interest expense and amortization
of debt issuance costs associated with the Notes and (ii) the impact on
income taxes from (i).
P-9
<PAGE>
THE ISSUER
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(1) Represents interest expense on the Notes at 9 1/8 % per annum for the
year ended December 31, 1995.
(2) Represents amortization of $7,000 in deferred debt issuance costs over
the seven year term of the Notes for the year ended December 31, 1995.
(3) Represents amounts necessary to adjust historical tax expense to the
pro forma computation. Pro forma tax expense for the year ended
December 31, 1995 related to the issuance of the Notes was computed as
follows:
<TABLE>
<CAPTION>
<S> <C>
Federal AMT, reduced, to the extent of 90%, by net operating
loss carryovers ................................................ $ (253)
State, at an assumed rate of 8% ................................. (1,102)
---------
$(1,355)
=========
</TABLE>
P-10
<PAGE>
THE ISSUER
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
SFFED ACQUISITION
<TABLE>
<CAPTION>
SFFED
ACQUISITION
VALUATION PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS(A) ADJUSTMENTS(B) TOTALS
------------ -------------- -------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable .......................... $215,147 $ 15,566 (1) $ -- $230,713
Securities ................................ 10,685 -- -- 10,685
Mortgage-backed securities ................ 60,024 2,379 (1) -- 62,403
Other interest income ..................... -- -- -- --
------------ -------------- -------------- -------------
Total interest income .................... 285,856 17,945 -- 303,801
INTEREST EXPENSE:
Deposits .................................. 135,299 8,498 (1) -- 143,797
Borrowings ................................ 71,543 3,044 (1) -- 74,587
------------ -------------- -------------- -------------
Total interest expense ................... 206,842 11,542 -- 218,384
------------ -------------- -------------- -------------
Net interest income ....................... 79,014 6,403 -- 85,417
Provision for loan losses ................. 11,094 -- -- 11,094
------------ -------------- -------------- -------------
Net interest income after provision for
loan losses .............................. 67,920 6,403 -- 74,323
NONINTEREST INCOME:
Customer banking fees ..................... 5,291 -- -- 5,291
Mortgage banking operations ............... 5,255 (4,395)(1) -- 860
Net loss on sales of assets ............... -- -- -- --
Other ..................................... 1,677 -- -- 1,677
------------ -------------- -------------- -------------
Total noninterest income ................. 12,223 (4,395) -- 7,828
NONINTEREST EXPENSE:
Compensation and benefits ................. 35,518 -- (24,377)(3) 11,141
Other ..................................... 43,257 12,905 (2) (21,266)(3) 34,896
------------ -------------- -------------- -------------
Total noninterest expense ................ 78,775 12,905 (45,643) 46,037
------------ -------------- -------------- -------------
Income (loss) before income taxes,
extraordinary item and minority interest 1,368 (10,897) 45,643 36,114
Federal and state income taxes ............ 1,568 -- 1,986 (4) 3,554
------------ -------------- -------------- -------------
Income (loss) before extraordinary item
and minority interest .................... (200) (10,897) 43,657 32,560
Extraordinary item--gain on early
extinguishment of FHLB advances, net .... -- -- -- --
------------ -------------- -------------- -------------
Net income (loss) before minority interest (200) (10,897) 43,657 32,560
Minority interest ......................... -- -- -- --
------------ -------------- -------------- -------------
Net income (loss) ......................... $ (200) $(10,897) $ 43,657 $ 32,560
============ ============== ============== =============
</TABLE>
- ------------
(a) Represents adjustments to reflect (i) the amortization/accretion of
fair value adjustments and (ii) the elimination of amortization of
historical goodwill.
(b) Represents adjustments to reflect (i) the elimination of certain
noninterest expense due to consolidation of SFFed operations with the
Bank, (ii) the elimination of certain historical noninterest expense
recorded by SFFed as a result of the acquisition by the Bank and (iii)
income taxes relative to the SFFed Acquisition.
P-11
<PAGE>
THE ISSUER
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
SFFED ACQUISITION
- -----------------
(1) Represents amortization/accretion of fair value adjustments as follows:
<TABLE>
<CAPTION>
IMPACT ON INCOME
BEFORE INCOME TAXES,
EXTRAORDINARY ITEM
AND MINORITY
INTEREST
INCREASE/(DECREASE)
--------------------
<S> <C>
Loans receivable, net .... $15,566
Mortgage-backed securities 2,379
Deposits .................. (8,498)
Borrowings ................ (3,044)
Mortgage servicing rights (4,395)
</TABLE>
(2) Represents adjustments consisting of the following:
<TABLE>
<CAPTION>
IMPACT ON INCOME
BEFORE INCOME TAXES,
EXTRAORDINARY ITEM
AND MINORITY
INTEREST
INCREASE/(DECREASE)
--------------------
<S> <C>
Amortization of fair value adjustments:
Amortization of core deposit intangible assets ........ $ (3,368)
Amortization of goodwill ............................... (10,206)
Elimination of amortization of SFFed's historical
goodwill ................................................ 669
--------------------
$(12,905)
====================
</TABLE>
(3) Represents adjustments to noninterest expense relating to the
consolidation of SFFed's operations into those of the Bank and the
elimination of nonrecurring historical expenses related to the SFFed
Acquisition:
<TABLE>
<CAPTION>
<S> <C>
Decrease in compensation and benefits due to the reduction in headcount
from 620 at January 1, 1995 to approximately 260 after the consummation
of the SFFed Acquisition. Substantially all retained employees represent
retail branch personnel ............................................... $19,037
Elimination of certain accruals recorded by SFFed related to the
acquisition by the Bank:
Payments under employment contracts .................................. 2,080
Accruals for benefit plans frozen by the Bank ........................ 3,260
---------
$24,377
=========
</TABLE>
P-12
<PAGE>
(4) Represents adjustments to other noninterest expense relating to the
consolidation of SFFed's operations into those of the Bank and the
elimination of nonrecurring historical expenses of SFFed. Substantially all
of SFFed's operations will be consolidated into the existing operations of
the Bank, resulting in a reduction in headcount of approximately 58% with the
remaining personnel primarily consisting of retail branch personnel. In
addition, ten retail branches will be closed.
<TABLE>
<CAPTION>
COST OF ADJUSTMENT-
HISTORICAL ONGOING EXPENSE
COSTS OPERATIONS REDUCTION
------------ ------------ -------------
<S> <C> <C> <C>
Expense decreases due to consolidation:
Mortgage banking operations:
Occupancy expenses, including insurance ......... $ 1,329 $ 588 $ 741
Travel, automobile and employee dues ............ 282 67 215
Telecommunications, postage and supplies ........ 900 214 686
Other, net ...................................... 1,047 460 587
------------ ------------ -------------
Subtotal mortgage banking operations ........... $ 3,558 $ 1,329 $ 2,229
============ ============ =============
Retail Banking operations -- reductions due to
consolidation of ten retail branches and retail
operations center:
Occupancy expenses, including insurance ......... $11,220 $ 3,405 $ 7,815
SAIF assessment reduction based on lower
historical assessment rate for the Bank ....... 6,811 6,011 800
Travel, automobile and employee dues ............ 410 60 350
Telecommunications and data processing .......... 1,766 364 1,402
Postage and messenger costs ..................... 666 473 193
Other costs, net ................................ 216 108 108
------------ ------------ -------------
Subtotal retail banking operations ............. $21,089 $10,421 $10,668
============ ============ =============
Overhead areas, including executive officers,
legal, human resources, information services,
accounting, and strategic planning areas:
Occupancy costs .................................. $ 1,316 $ 0 $ 1,316
Data processing costs ............................ 2,848 1,000 1,848
Marketing and advertising expenses ............... 2,094 500 1,594
Other overhead costs ............................. 8,072 8,072 0
------------ ------------ -------------
Subtotal overhead areas ........................ $14,330 $ 9,572 $ 4,758
============ ============ =============
Total decreases due to consolidation .......... $38,977 $21,322 $17,655
Elimination of certain nonrecurring expense
recorded by SFFed related to the acquisition by
the Bank:
Data processing termination fees ................. 875 -- 875
Investment banker fees related to the SFFed
Acquisition .................................... 2,311 -- 2,311
Legal fees related to the SFFed Acquisition ...... 425 -- 425
------------ ------------ -------------
Total expense reduction ....................... $42,588(i) $21,322 $21,266
============ ============ =============
</TABLE>
[FN]
- ------------
(i) Balance represents total historical noninterest expense of $43,257 less
historical amortization of goodwill already adjusted in note 2 on page
P-12.
P-13
<PAGE>
(5) Represents amount necessary to adjust historical tax expense to the pro
forma computation. Pro forma tax expense for the year ended December 31, 1995
related to the SFFed Acquisition was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal AMT, reduced, to the extent of 90%, by net operating
loss carryovers ................................................ $ 665
State, at an assumed rate of 8% ................................. 2,889
-------
$3,554
=======
</TABLE>
P-14
<PAGE>
THE ISSUER
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
LMUSA PURCHASES
<TABLE>
<CAPTION>
PRO FORMA LMUSA PURCHASES
HISTORICAL(A) ADJUSTMENTS(B) ADJUSTMENTS(C) PRO FORMA TOTALS
------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable ............................ $ 22,477 $ -- $ -- $22,477
Securities .................................. -- -- -- --
Mortgage-backed securities .................. -- -- -- --
Other interest income ....................... -- -- -- --
------------- -------------- -------------- ----------------
Total interest income ..................... 22,477 -- -- 22,477
INTEREST EXPENSE:
Deposits .................................... -- -- -- --
Borrowings .................................. 38,358 -- (36,340)(2) 2,018
------------- -------------- -------------- ----------------
Total interest expense .................... 38,358 -- (36,340) 2,018
------------- -------------- -------------- ----------------
Net interest income ......................... (15,881) -- 36,340 20,459
Provision for loan losses ................... -- -- -- --
------------- -------------- -------------- ----------------
Net interest income after provision for loan
losses ..................................... (15,881) -- 36,340 20,459
NONINTEREST INCOME:
Customer banking fees ....................... -- -- -- --
Mortgage banking operations ................. 77,887 (1,442)(1) -- 76,445
Net loss on sales of assets ................. (1,851) -- -- (1,851)
Other ....................................... 2,690 -- -- 2,690
------------- -------------- -------------- ----------------
Total noninterest income .................. 78,726 (1,442) -- 77,284
NONINTEREST EXPENSE:
Compensation and benefits ................... 38,426 -- (18,926)(3) 19,500
Other ....................................... 300,091 -- (262,010)(4) 38,081
------------- -------------- -------------- ----------------
Total noninterest income .................... 338,517 -- (280,936) 57,581
------------- -------------- -------------- ----------------
Income (loss) before income taxes,
extraordinary item and minority interest .. (275,672) (1,442) 317,276 40,162
Federal and state income taxes .............. -- -- 3,952 (5) 3,952
------------- -------------- -------------- ----------------
Income (loss) before extraordinary item and
minority interest .......................... (275,672) (1,442) 313,324 36,210
Extraordinary item--gain on early
extinguishment of FHLB advances, net ...... -- -- -- --
------------- -------------- -------------- ----------------
Net income (loss) before minority interest . (275,672) (1,442) 313,324 36,210
Minority interest ........................... -- -- -- --
------------- -------------- -------------- ----------------
Net income (loss) ........................... $(275,672) $(1,442) $ 313,324 $36,210
============= ============== ============== ================
</TABLE>
- ------------
(a) The LMUSA 1995 Purchase was consummated on October 2, 1995.
Accordingly, historical financial data relating to operations acquired
in the LMUSA 1995 Purchase is presented for the nine months ended
September 30, 1995 (unaudited). Historical financial data relating to
operations acquired in the LMUSA 1996 Purchase is presented for the
year ended December 31, 1995 (unaudited). Historical financial
statements were not available; accordingly, historical data presented
reflects best estimates of the management of First Nationwide Bank.
(b) Represents adjustments to reflect (i) the amortization of the fair
value of mortgage servicing rights and (ii) the elimination of
amortization of historical mortgage servicing rights.
(c) Represents adjustments to reflect (i) the decrease in interest expense
resulting from the transfer of custodial accounts acquired to First
Nationwide Bank, (ii) decreases in compensation and benefits expense
due to reduction in staffing, (iii) elimination of certain other
noninterest expenses due to consolidation with First Nationwide Bank's
existing mortgage banking operations, and (iv) income taxes relative to
the LMUSA Purchases.
P-15
<PAGE>
THE ISSUER
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
LMUSA PURCHASES
(1) Represents the difference between the amortization of pro forma
recorded balance of mortgage servicing rights and the historical
amortization of mortgage servicing rights as follows:
<TABLE>
<CAPTION>
IMPACT ON INCOME BEFORE
INCOME TAXES, EXTRAORDINARY
ITEM AND MINORITY INTEREST
INCREASE (DECREASE)
---------------------------
<S> <C>
Pro forma amortization ... $(48,941)
Historical amortization(i) 47,499
---------------------------
$ (1,442)
===========================
</TABLE>
(i) Represents elimination of amortization of mortgage servicing
rights of $47,499 included in LMUSA's historical consolidated
statement of operations for the year ended December 31, 1995.
(2) Represents a decrease in interest expense resulting from a reduction in
funding costs due to the transfer of custodial accounts acquired to the
Bank.
(3) Represents the adjustment necessary to reduce compensation and benefits
expense to the level necessary for the incremental number
(approximately 650) of LMUSA employees retained by the Issuer as a
result of the LMUSA Purchases, with average annual compensation and
benefits per employee of $30,000.
(4) Represents the impact on other noninterest expense of (i) the
elimination of historical amounts related to LMUSA operations not
included in the LMUSA Purchases and (ii) the consolidation of the LMUSA
Purchases into the Bank's existing mortgage banking operations, as
follows:
<TABLE>
<CAPTION>
DECREASE IN
OTHER
HISTORICAL ESTIMATED NONINTEREST
COSTS FUTURE COSTS EXPENSE
------------ ------------- -------------
<S> <C> <C> <C>
COMPONENTS OF HISTORICAL NONINTEREST
EXPENSE:
Interest rate swap agreements ............... $ 6,615 $ -- (ii) $ (6,615)
Facilities charge-offs ...................... 38,559 -- (ii) (38,559)
Facilities depreciation ..................... 1,797 -- (ii) (1,797)
Provision for losses on assets held for sale 180,255 -- (ii) (180,255)
Reorganization items ........................ 16,892 -- (ii) (16,892)
Data processing, document storage,
administrative services and management
fees ....................................... 20,896 3,004 (iii) (17,892)
Other miscellaneous costs ................... 35,077 35,077 --
------------ ------------- -------------
$300,091 $38,081 $(262,010)
============ ============= =============
</TABLE>
(ii) Represents historical amounts related to operations not
included in the LMUSA Purchases.
(iii) Represents amounts necessary to replace these services based
on the Issuer's historical annual cost per loan based on the average
number of loans serviced.
(5) Represents amount necessary to adjust historical tax expense to the pro
forma computation. Pro forma tax expense for the year ended December
31, 1995 related to the LMUSA Purchases was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal AMT, reduced, to the extent of 90%, by net
operating loss carryovers ................................. $ 739
State, at an assumed rate of 8% ............................ 3,213
-------
$3,952
=======
</TABLE>
P-16
<PAGE>
THE ISSUER
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
BRANCH SALES
<TABLE>
<CAPTION>
BRANCH SALES
OHIO SALE PRO MICHIGAN SALE NORTHEAST SALE PRO FORMA
FORMA PRO FORMA PRO FORMA TOTALS
------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable ....................... $ (119)(a) $ (64)(a) $ (440)(a) $ (623)
Securities ............................. -- -- -- --
Mortgage-backed securities ............. -- -- -- --
Other interest income .................. -- -- -- --
------------- --------------- -------------- --------------
Total interest income ................. (119) (64) (440) (623)
INTEREST EXPENSE:
Deposits ............................... (65,588)(a) (32,677)(a) (113,265)(a) (211,530)
Borrowings ............................. 86,565 (1) 45,869 (1) 148,237 (1) 280,671
------------- --------------- -------------- --------------
Total interest expense ................ 20,977 13,192 34,972 69,141
------------- --------------- -------------- --------------
Net interest income .................... (21,096) (13,256) (35,412) (69,764)
Provision for loan losses .............. -- -- -- --
------------- --------------- -------------- --------------
Net interest income after provision for
loan losses ........................... (21,096) (13,256) (35,412) (69,764)
NONINTEREST INCOME:
Customer banking fees .................. (7,076)(a) (5,673)(a) (9,479)(a) (22,228)
Mortgage banking operations ............ -- -- -- --
Net loss on sales of assets ............ -- -- -- --
Other .................................. (240)(a) (139)(a) (410)(a) (789)
------------- --------------- -------------- --------------
Total noninterest income .............. (7,316) (5,812) (9,889) (23,017)
NONINTEREST EXPENSE:
Compensation and benefits .............. (6,771)(a) (4,154)(a) (8,551)(a) (19,476)
Other .................................. (7,436)(a) (4,348)(a) (14,039)(a) (25,823)
------------- --------------- -------------- --------------
Total noninterest expense ............. (14,207) (8,502) (22,590) (45,299)
------------- --------------- -------------- --------------
Income (loss) before income taxes,
extraordinary item and minority
interest .............................. (14,205) (10,566) (22,711) (47,482)
Federal and state income taxes ......... (1,397) (1,039) (2,235) (4,671)(2)
------------- --------------- -------------- --------------
Income (loss) before extraordinary item
and minority interest ................. (12,808) (9,527) (20,476) (42,811)
Extraordinary item-gain on early
extinguishment of FHLB advances, net . -- -- -- --
------------- --------------- -------------- --------------
Net income (loss) before minority
interest .............................. (12,808) (9,527) (20,476) (42,811)
Minority interest ...................... -- -- -- --
------------- --------------- -------------- --------------
Net income (loss) ...................... $ (12,808) $ (9,527) $ (20,476) $ (42,811)
============= =============== ============== ==============
</TABLE>
- ------------
(a) Represents historical information related to the retail banking
facilities in Ohio, Michigan and the Northeast. Other noninterest
expense includes occupancy, SAIF insurance premiums, marketing, OTS
assessments, data processing and telecommunications directly
attributable to the Ohio, Michigan and Northeast retail branch
operations.
P-17
<PAGE>
THE ISSUER
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
BRANCH SALES
(1) Represents increase in interest expense on borrowings to fund the Branch
Sales, as follows:
<TABLE>
<CAPTION>
FUNDING ADDITIONAL INTEREST
SOURCE PERIOD BORROWINGS RATE EXPENSE
- --------------- ----------------------------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
FHLB Advances January 1, 1995 - December 31, 1995 $2,000,000 7.72%(i) $154,400
Reverse Repos January 1, 1995 - December 31, 1995 2,132,967 5.92%(ii) 126,271
------------ --------------
$4,132,967 $280,671 (iii)
============ ==============
</TABLE>
The sales are assumed to be funded by a combination of a one-year FHLB
advance of $2 billion and reverse repurchase agreements, as these instruments
most closely meet the Issuer's current interest rate risk management
objectives in conjunction with the borrowing capacities for the respective
debt instruments. Additional pro forma borrowings are computed as follows:
<TABLE>
<CAPTION>
OHIO MICHIGAN NORTHEAST TOTAL
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Deposit totals at January 1, 1995 .......... $1,431,872 $749,788 $2,369,728 $4,551,388
Less:
Carrying value of office premises and
equipment ................................ 8,591 6,510 13,397 28,498
Carrying value of loans receivable ....... 2,836 3,333 6,353 12,522
Carrying value of cash and cash
equivalents .............................. 9,395 3,830 8,150 21,375
Gain on sale (iv) ......................... 131,233 52,510 172,283 356,026
------------ ---------- ------------ ------------
Additional pro forma borrowings ............ $1,279,817 $683,605 $2,169,545 $4,132,967
============ ========== ============ ============
</TABLE>
(i) Represents rate for a one-year fixed rate FHLB advance as of January
1, 1995.
(ii) Represents average reverse repurchase rate for 1995.
(iii) Branch sales consummated through March 31, 1996 have been funded with
a mix of FHLB advances and reverse repurchase agreements at a
weighted average rate of 5.45%, compared to 6.79% used in the pro
forma date which is based on blended borrowing rates during 1995, as
reflected in (i) and (ii) above. Applying the actual average rate to
the additional borrowings used to fund the Branch Sales has the
effect of decreasing the pro forma interest expense on borrowings by
$49,882 on an after tax basis.
(iv) Represents pro forma gain on Branch Sales, computed as follows:
<TABLE>
<CAPTION>
OHIO MICHIGAN NORTHEAST TOTAL
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Deposit totals at January 1, 1995 $1,431,872 $749,788 $2,369,728 $4,551,388
Premium percentage per contract . 9.10% 7.18% 7.30% 7.86%
------------ ---------- ------------ ------------
Total pro forma premium ......... 130,300 53,835 172,990 357,125
Write-off of core deposit
intangible ..................... 933 (1,325) (707) (1,099)
------------ ---------- ------------ ------------
Gain on sale of deposits (a) ... $ 131,233 $ 52,510 $ 172,283 $ 356,026
============ ========== ============ ============
</TABLE>
(a) The remaining assets and liabilities will be sold at their
respective carrying values, resulting in no gain or loss.
(2) Represents amount necessary to adjust historical tax expense to the pro
forma computation. Pro forma tax expense for the year ended December
31, 1995 related to the Branch Sales was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal AMT, reduced, to the extent of 90%, by net
operating loss carryovers ........................ $ (873)
State, at an assumed rate of 8% ................... (3,798)
---------
$(4,671)
=========
</TABLE>
P-18
<PAGE>
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE ISSUER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION, TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE ISSUER SINCE SUCH DATE.
- -----------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Available Information ...................... 2
Summary .................................... 3
Risk Factors ............................... 17
Strategic Acquisitions and Dispositions ... 26
Use of Proceeds ............................ 28
Consolidated Capitalization ................ 29
Pro Forma Financial Data ................... 30
Selected Historical Financial Data ........ 38
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................ 41
The Exchange Offer ......................... 68
Business ................................... 75
Regulation ................................. 109
Management ................................. 117
Ownership of the Common Stock .............. 123
Certain Transactions ....................... 123
Description of the Senior Notes ............ 127
Description of the Notes ................... 127
Certain U.S. Federal Income Tax
Considerations ............................ 150
Plan of Distribution ....................... 152
Legal Matters .............................. 152
Experts .................................... 152
Index of Defined Terms ..................... 154
Index to Financial Statements .............. F-1
</TABLE>
UNTIL AUGUST 13, 1996 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN THE
EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
$140,000,000
FIRST NATIONWIDE
HOLDINGS INC.
9 1/8% SENIOR
SUBORDINATED EXCHANGE
NOTES DUE 2003
PROSPECTUS
MAY 15, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is a table of the SEC registration fee and estimates of
all other expenses to be incurred in connection with the issuance and
distribution of the securities described in this Registration Statement:
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee ............ $ 48,276
Exchange Agent fees and expenses 15,000
Printing and engraving expenses 300,000
Legal fees and expenses ......... 250,000
Accounting fees and expenses ... 225,000
Miscellaneous ................... 11,724
----------
Total ......................... $850,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Corporation Law") empowers a Delaware corporation to indemnify any
persons who are, or are threatened to be made, parties to any threatened,
pending or completed legal action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of such corporation), by reason of the fact that such person is or was
an officer, director, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided that such officer or director acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best
interests, and, for criminal proceedings, had no reasonable cause to believe
his conduct was unlawful. A Delaware corporation may indemnify officers and
directors against expenses (including attorneys' fees) in an action by or in
the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any
action referred to above, the corporation must indemnify him against the
expenses which such officer or director actually and reasonably incurred.
Article VIII of the By-laws of the Registrant, a copy of which is filed as
Exhibit 3.2 to this Registration Statement, allows the Registrant to maintain
director and officer liability insurance on behalf of any person who is or
was a director or officer of the Registrant or such person who serves or
served as a director, officer, employee or agent, of another corporation,
partnership or other enterprise at the request of the Registrant. Article
VIII of the Registrant's By-Laws provides for indemnification of the officers
and directors of the Registrant to the fullest extent permitted by applicable
law.
Pursuant to Section 102(b)(7) of the Delaware Corporation Law, Article
Fifth of the Certificate of Incorporation of the Registrant, a copy of which
is filed as Exhibit 3.1 to this Registration Statement, provides that no
director of the Registrant shall be personally liable to the Registrant or
its shareholders for monetary damages for any breach of his fiduciary duty as
a director; provided, however, that such clause shall not apply to any
liability of a director (1) for any breach of his duty of loyalty to the
Registrant or its stockholders, (2) for acts or omissions that are not in
good faith or involve intentional misconduct or a knowing violation of the
law, (3) under Section 174 of the Delaware Corporation Law, or (4) for any
transaction from which the director derived an improper personal benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the organization of the Registrant, on July 27, 1994,
Holdings contributed 800 shares of common stock of the Bank to the Registrant
in exchange for 1,000 shares of common stock of the Registrant.
II-1
<PAGE>
On July 27, 1994, the Registrant sold $194,300,000 aggregate principal
amount of its 12 1/4% Senior Notes Due 2001 (the "Old Senior Notes") to CS
First Boston Corporation, Smith Barney Inc. and Friedman, Billings, Ramsey &
Co., Inc. (the "Senior Notes Initial Purchasers") and $5,700,000 aggregate
principal amount of Old Senior Notes to Gerald J. Ford, Carl B. Webb and Lacy
G. Newman for $200,000,000 less the aggregate discount to Initial Purchasers
of $7,000,000. Such transactions were exempt from the registration
requirements of the Securities Act of 1933, in reliance on Section 4(2) of
the Securities Act on the basis that such transactions did not involve a
public offering. In accordance with the agreement pursuant to which the
Senior Notes Initial Purchasers purchased the Old Senior Notes, such Senior
Notes Initial Purchasers agreed to offer and sell the Old Senior Notes only
to "qualified institutional buyers" (as defined in Rule 144A under the
Securities Act), a limited number of institutional "accredited investors" (as
defined in Rule 501(A)(1), (2), (3) or (7) under the Securities Act) and
pursuant to offers and sales that occur outside the United States within the
meaning of Regulation S under the Securities Act.
On January 31, 1996, the Registrant sold $140,000,000 aggregate principal
amount of the Old Notes to Smith Barney Inc. and Keefe, Bruyette & Woods,
Inc. (the "Initial Purchasers") for $140,000,000 less the aggregate discount
to Initial Purchasers of $4,900,000. The transaction was exempt from the
registration requirements of the Securities Act in reliance on Section 4(2)
of the Securities Act on the basis that such transaction did not involve a
public offering. In accordance with the agreement pursuant to which the
Initial Purchasers purchased the Old Notes, such Initial Purchasers agreed to
offer and sell the Old Notes only to "qualified instituted buyers," a limited
number of institutional "accredited investors" and pursuant to offers and
sales that occur outside the United States within the meaning of Regulation S
under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
<S> <C> <C>
*3.1 Fourth Restated Certificate of Incorporation of the Registrant.
*3.2 By-laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's filing on
Form 10-K for the year ended December 31, 1994).
*4.1 Indenture, dated as of January 31, 1996, between the Registrant and The Bank of
New York, as trustee, relating to the New Notes.
*4.2 Indenture, dated as of July 15, 1994, between the Registrant and The First National Bank of
Boston, as trustee, relating to the 12 1/4 % Senior Exchange Notes Due 2001 (incorporated by
reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (File No.
33-82654)).
*4.3 Indenture, dated as of October 1, 1986, between First Nationwide Bank, A Federal Savings Bank,
and Bank of America National Trust and Savings Association Re: $100,000,000 10% Subordinated
Debentures due 2006 (incorporated by reference to Exhibit 4.5 to the Registrant's filing on Form
10-K for the year ended December 31, 1994).
*4.4 First Supplemental Indenture, dated as of September 30, 1994, among First Madison Bank, FSB,
First Nationwide Bank, A Federal Savings Bank, and Bank of America National Trust and Savings
Association, supplementing the Indenture, dated as of October 1, 1986, between First Nationwide
Bank, A Federal Savings Bank, and Bank of America National Trust and Savings Association Re:
$100,000,000 10% Subordinated Debentures due 2006 (incorporated by reference to Exhibit 4.6 to
the Registrant's filing on Form 10-K for the year ended December 31, 1994).
*4.5 Note Purchase Agreement, dated as of September 1, 1994, between SFFed Corp. and each of the
purchasers.
II-2
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
*4.6 First Amendment and Waiver Agreement, dated as of December 11, 1995, between SFFed Corp. and each
of the purchasers, supplementing the Note Purchase Agreement, dated as of September 1, 1994,
between SFFed Corp. and each of the purchasers.
*4.7 Registration Agreement, dated January 23, 1996, by and among the Registrant, Smith Barney Inc.
and Keefe, Bruyette & Woods, Inc.
*5.1 Opinion of Paul, Weiss, Rifkind, Wharton & Garrison, counsel to the Registrant, regarding the
legality of the New Notes.
*10.1 Tax Sharing Agreement, effective as of January 1, 1994, by and among First Madison Bank, FSB, the
Registrant and Mafco Holdings, Inc. (incorporated by reference to Exhibit 10.10 to the
Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
*10.2 Asset Purchase Agreement, dated as of April 14, 1994, between First Madison Bank, FSB, and First
Nationwide Bank, A Federal Savings Bank (incorporated by reference to Exhibit 2.1 to the
Registrant's filing on Form 8-K dated October 3, 1995).
*10.3 Assistance Agreement, dated as of December 28, 1988, among the Federal Savings and Loan Insurance
Corporation, First Madison Bank, FSB (formerly named First Texas Bank, FSB) and MacAndrews &
Forbes Holdings Inc. (incorporated by reference to Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 (File No. 33-82654)).
*10.4 Modification Agreement, dated January 31, 1992, among the Federal Deposit Insurance Corporation,
as manager of the FSLIC Resolution Fund, Resolution Trust Corporation, First Madison Bank, FSB
(formerly named First Gibraltar Bank, FSB), First Gibraltar Holdings Inc. and MacAndrews & Forbes
Holdings Inc. (incorporated by reference to Exhibit 10.3 to the Registrant's Registration
Statement on Form S-1 (File No. 33-82654)).
*10.5 Amendment No. 1 to the Asset Purchase Agreement, dated as of September 30, 1994, between First
Madison Bank, FSB, and First Nationwide Bank, A Federal Savings Bank (incorporated by reference
to Exhibit 2.3 to the Registrant's filing on Form 8-K dated October 3, 1994).
*10.6 Amendment No. 2 to the Asset Purchase Agreement, dated as of September 30, 1994, between First
Madison Bank, FSB, and First Nationwide Bank, A Federal Savings Bank (incorporated by reference
to Exhibit 2.4 to the Registrant's filing on Form 8-K dated October 3, 1994).
*10.7 Non-Performing Asset Sale Agreement, dated September 30, 1994, between First Madison Bank, FSB,
and Granite Management and Disposition, Inc. (incorporated by reference to Exhibit 10.1 to the
Registrant's filing on Form 8-K dated October 3, 1994).
*10.8 Settlement Agreement, dated July 17, 1991, by and among First Gibraltar Bank, FSB, Affiliated
Computer Services, Inc. and the Federal Deposit Insurance Corporation, in its corporate capacity,
the Federal Deposit Insurance Corporation, as receiver for Gibraltar Savings Association, and the
Federal Deposit Insurance Corporation, as receiver for First Texas Savings Association
(incorporated by reference to Exhibit 10.2 to the Registrant's filing on Form 8-K dated October
3, 1994).
*10.9 Office Lease dated as of November 15, 1990, between Webb/San Francisco Ventures, Ltd. and First
Nationwide Bank, A Federal Savings Bank. Confidential treatment has been granted for portions of
this document (incorporated by reference to Exhibit 10.6 to Amendment No. 3 to the Registrant's
Registration Statement on Form S-1 (File No. 33-82654)).
*10.10 Exchange Agreement dated September 26, 1994 by and among Gerald J. Ford, the Registrant and
NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.12 to Amendment No. 2 to the
Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
*10.11 Exchange Agreement dated October 20, 1994 between Carl B. Webb and the Registrant.
II-3
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
*10.12 Stockholders Agreement dated October 3, 1994 by and among Gerald J. Ford, the Registrant and
First Nationwide (Parent) Holdings Inc. (incorporated by reference to Exhibit 10.16 to Amendment
No. 2 to the Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
*10.13 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Gerald J. Ford,
dated as of October 1, 1994 (incorporated by reference to Exhibit 10.13 to the Registrant's
filing on Form 10-K for the year ended December 31, 1994).
*10.14 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Carl B. Webb, II,
dated as of February 1, 1995 (incorporated by reference to Exhibit 10.14 to the Registrant's
filing on Form 10-K for the year ended December 31, 1994).
*10.15 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Christie S.
Flanagan, dated as of October 1, 1994 (incorporated by reference to Exhibit 10.15 to the
Registrant's filing on Form 10-K for the year ended December 31, 1994).
*10.16 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and James R. Staff,
dated as of February 1, 1995 (incorporated by reference to Exhibit 10.16 to the Registrant's
filing on Form 10-K for the year ended December 31, 1994).
*10.17 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Lacy Newman,
dated as of February 1, 1995.
*10.18 Mortgage Company Asset Sale Agreement by and among Resolution Trust Corporation as conservator
for Standard Federal Savings Association, America's Mortgage Servicing, Inc., A Mortgage Company,
America's Lending Network, Inc. and StanFed Financial Services, Inc., and First Nationwide
Mortgage Corporation, dated as of December 1, 1994 (incorporated by reference to Exhibit 10.18 to
the Registrant's filing on Form 10-K for the year ended December 31, 1994).
*10.19 Receivables Sale Agreement by and among Resolution Trust Corporation as conservator for Standard
Federal Savings Association, America's Mortgage Servicing, Inc., A Mortgage Company, and
America's Lending Network, Inc., and First Nationwide Mortgage Corporation, dated as of December
1, 1994 (incorporated by reference to Exhibit 10.19 to the Registrant's filing on Form 10-K for
the year ended December 31, 1994).
*10.20 Purchase and Sale Agreement by and between Resolution Trust Corporation in its corporate capacity
and First Nationwide Mortgage Corporation, dated as of December 1, 1994 (incorporated by
reference to Exhibit 10.20 to the Registrant's filing on Form 10-K for the year ended December
31, 1994).
*10.21 Purchase and Sale Agreement by and among Resolution Trust Corporation as receiver of or
conservator for certain associations and First Nationwide Mortgage Corporation, dated as of
December 1, 1994 (incorporated by reference to Exhibit 10.21 to the Registrant's filing on Form
10-K for the year ended December 31, 1994).
*10.22 Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal
Savings Association, et al., and First Nationwide Mortgage Corporation, dated December 2, 1994,
regarding the Mortgage Company Asset Sale Agreement, Receivable Sales Agreement, and two Purchase
and Sales Agreements among such parties, as of December 1, 1994 (incorporated by reference to
Exhibit 10.22 to the Registrant's filing on Form 10-K for the year ended December 31, 1994).
*10.23 Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal
Savings Association, et al., and First Nationwide Mortgage Corporation, dated February 23, 1995,
regarding the Mortgage Company Asset Sale Agreement, Receivable Sales Agreement, and two Purchase
and Sales Agreements among such parties, as of December 1, 1994 (incorporated by reference to
Exhibit 10.23 to the Registrant's filing on Form 10-K for the year ended December 31, 1994).
II-4
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
*10.24 Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal
Savings Association, et al., and First Nationwide Mortgage Corporation, dated February 24, 1995,
regarding the Mortgage Company Asset Sale Agreement among such parties, as of December 1, 1994
(incorporated by reference to Exhibit 10.24 to the Registrant's filing on Form 10-K for the year
ended December 31, 1994).
*10.25 Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal
Savings Association, et al., and First Nationwide Mortgage Corporation, dated February 28, 1995,
regarding the Mortgage Company Asset Sale Agreement among such parties, as of December 1, 1994
(power of attorney matters) (incorporated by reference to Exhibit 10.25 to the Registrant's
filing on Form 10-K for the year ended December 31, 1994).
*10.26 Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal
Savings Association, et al., and First Nationwide Mortgage Corporation, dated February 28, 1995,
regarding the Mortgage Company Asset Sale Agreement among such parties, as of December 1, 1994
(amendments to schedules) (incorporated by reference to Exhibit 10.26 to the Registrant's filing
on Form 10-K for the year ended December 31, 1994).
*10.27 Agreement for Provision of Services between First Nationwide Bank, A Federal Savings Bank, and
Trans Network Insurance Services Inc. (then named "First Gibraltar (Parent) Holdings Inc."),
dated effective December 1, 1994 (incorporated by reference to Exhibit 10.27 to the Registrant's
filing on Form 10-K for the year ended December 31, 1994).
*10.28 Assignment from Trans Network Insurance Services Inc. to First Nationwide Management Corp. of
Agreement for Provision of Services (incorporated by reference to Exhibit 10.37 to the
Registrant's filing on Form 10-K for the year ended December 31, 1995).
*10.29 Asset Purchase Agreement between Trans Network Insurance Services Inc. and FNC Insurance Agency,
Inc. dated effective June 1, 1995 (incorporated by reference to Exhibit 10.24 to Post-Effective
Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
*10.30 Trans Network Marketing and Support Services Agreement between First Nationwide Bank, A Federal
Savings Bank, and Trans Network Insurance Services Inc. dated effective June 1, 1995
(incorporated by reference to Exhibit 10.25 to Post-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (File No. 33-82654)).
*10.31 Amendment No. 2 to Lease between First Nationwide Bank, A Federal Savings Bank, and RNM 135 Main,
L.P. dated April 6, 1995 (incorporated by reference to Exhibit 10.26 to Post-Effective Amendment
No. 1 to the Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
*10.32 Consulting Agreement between First Nationwide Management Corp. and Gerald J. Ford dated as of
October 1, 1994 (incorporated by reference to Exhibit 10.27 to Post-Effective Amendment No. 1 to
the Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
*10.33 First Amendment, dated as of January 1, 1995, by and among First Nationwide Management Corp.,
Diamond A-Ford Corporation, Trans Network Insurance Services, Inc. and Gerald J. Ford,
supplementing the Consulting Agreement between First Nationwide Management Corp. and Gerald J.
Ford dated as of October 1, 1994.
*10.34 Management Incentive Plan for Certain Employees of First Nationwide Bank, A Federal Savings Bank.
*10.35 Reimbursement and Expense Allocation Agreement, dated as of January 1, 1996, by and between First
Nationwide Management Corp. and the Registrant.
II-5
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
*10.36 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Roger L. Gordon,
dated as of January 30, 1996 (incorporated by reference to Exhibit 10.15 to the Registrant's
filing on Form 10-K for the year ended December 31, 1995).
*10.37 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Richard P. Hodge
(incorporated by reference to Exhibit 10.16 to the Registrant's filing on Form 10-K for the year
ended December 31, 1995).
*12.1 Statement regarding the computation of ratio of earnings to fixed charges for the Registrant
(incorporated by reference to Exhibit 12.1 to the Registrant's filing on Form 10-K for the year
ended December 31, 1995).
*21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2 Consent of Coopers & Lybrand LLP, Independent Auditors.
*23.3 Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1).
23.4 Consent of Deloitte & Touche LLP, Independent Auditors.
*24.1 Power of Attorney executed by Ronald O. Perelman.
*24.2 Power of Attorney executed by P. Richard Frieder (who resigned as a director of the Registrant
effective March 27, 1996).
*24.3 Power of Attorney executed by Howard Gittis.
*24.4 Power of Attorney executed by Irwin Engelman.
*24.5 Power of Attorney executed by Laurence Winoker.
*25.1 Statement of Eligibility and Qualification on Form T-1 of The Bank of New York, as trustee under
the Indenture relating to the Notes (bound separately).
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees.
*99.4 Form of Letter to Clients.
</TABLE>
- ------------
* Previously filed.
(b) Financial Statement Schedules: None
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more that
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement.
II-6
<PAGE>
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on May 15, 1996.
FIRST NATIONWIDE HOLDINGS INC.
By /s/ Glenn P. Dickes
-----------------------------------
Glenn P. Dickes
Vice President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ---------------------- ---------------------------------- ---------------
* Chairman of the Board, Chief May 15, 1996
---------------------- Executive Officer and Director
Ronald O. Perelman (Principal Executive Officer)
* Vice Chairman and Director May 15, 1996
----------------------
Howard Gittis
* Executive Vice President and Chief May 15, 1996
---------------------- Financial Officer (Principal
Irwin Engelman Financial Officer)
* Vice President and Controller May 15, 1996
---------------------- (Principal Accounting Officer)
Laurence Winoker
*Joram C. Salig, by signing his name hereto, does hereby execute this
Amendment No. 3 to the Registration Statement on behalf of the directors and
officers of the Registrant indicated above by asterisks, pursuant to powers
of attorney duly executed by such directors and officers and filed as
exhibits to the Registration Statement.
By /s/ Joram C. Salig
-----------------------------------
Joram C. Salig
Attorney-in-Fact
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NUMBER
- ----------- ------------------------------------------------------------------------------------------------- -----------------
<S> <C> <C>
*3.1 Fourth Restated Certificate of Incorporation of the Registrant.
*3.2 By-laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's filing on
Form 10-K for the year ended December 31, 1994).
*4.1 Indenture, dated as of January 31, 1996, between the Registrant and The Bank of
New York, as trustee, relating to the New Notes.
*4.2 Indenture, dated as of July 15, 1994, between the Registrant and The First National Bank of
Boston, as trustee, relating to the 12 1/4% Senior Exchange Notes Due 2001 (incorporated by
reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (File No.
33-82654)).
*4.3 Indenture, dated as of October 1, 1986, between First Nationwide Bank, A Federal Savings Bank,
and Bank of America National Trust and Savings Association Re: $100,000,000 10% Subordinated
Debentures due 2006 (incorporated by reference to Exhibit 4.5 to the Registrant's filing on Form
10-K for the year ended December 31, 1994).
*4.4 First Supplemental Indenture, dated as of September 30, 1994, among First Madison Bank, FSB,
First Nationwide Bank, A Federal Savings Bank, and Bank of America National Trust and Savings
Association, supplementing the Indenture, dated as of October 1, 1986, between First Nationwide
Bank, A Federal Savings Bank, and Bank of America National Trust and Savings Association Re:
$100,000,000 10% Subordinated Debentures due 2006 (incorporated by reference to Exhibit 4.6 to
the Registrant's filing on Form 10-K for the year ended December 31, 1994).
*4.5 Note Purchase Agreement, dated as of September 1, 1994, between SFFed Corp. and each of the
purchasers.
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE NUMBER
- ----------- ------------------------------------------------------------------------------------------------- --------------
*4.6 First Amendment and Waiver Agreement, dated as of December 11, 1995, between SFFed Corp. and each
of the purchasers, supplementing the Note Purchase Agreement, dated as of September 1, 1994,
between SFFed Corp. and each of the purchasers.
*4.7 Registration Agreement, dated January 23, 1996, by and among the Registrant, Smith Barney Inc.
and Keefe, Bruyette & Woods, Inc.
*5.1 Opinion of Paul, Weiss, Rifkind, Wharton & Garrison, counsel to the Registrant, regarding the
legality of the New Notes.
*10.1 Tax Sharing Agreement, effective as of January 1, 1994, by and among First Madison Bank, FSB, the
Registrant and Mafco Holdings, Inc. (incorporated by reference to Exhibit 10.10 to the
Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
*10.2 Asset Purchase Agreement, dated as of April 14, 1994, between First Madison Bank, FSB, and First
Nationwide Bank, A Federal Savings Bank (incorporated by reference to Exhibit 2.1 to the
Registrant's filing on Form 8-K dated October 3, 1995).
*10.3 Assistance Agreement, dated as of December 28, 1988, among the Federal Savings and Loan Insurance
Corporation, First Madison Bank, FSB (formerly named First Texas Bank, FSB) and MacAndrews &
Forbes Holdings Inc. (incorporated by reference to Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1 (File No. 33-82654)).
*10.4 Modification Agreement, dated January 31, 1992, among the Federal Deposit Insurance Corporation,
as manager of the FSLIC Resolution Fund, Resolution Trust Corporation, First Madison Bank, FSB
(formerly named First Gibraltar Bank, FSB), First Gibraltar Holdings Inc. and MacAndrews & Forbes
Holdings Inc. (incorporated by reference to Exhibit 10.3 to the Registrant's Registration
Statement on Form S-1 (File No. 33-82654)).
*10.5 Amendment No. 1 to the Asset Purchase Agreement, dated as of September 30, 1994, between First
Madison Bank, FSB, and First Nationwide Bank, A Federal Savings Bank (incorporated by reference
to Exhibit 2.3 to the Registrant's filing on Form 8-K dated October 3, 1994).
*10.6 Amendment No. 2 to the Asset Purchase Agreement, dated as of September 30, 1994, between First
Madison Bank, FSB, and First Nationwide Bank, A Federal Savings Bank (incorporated by reference
to Exhibit 2.4 to the Registrant's filing on Form 8-K dated October 3, 1994).
*10.7 Non-Performing Asset Sale Agreement, dated September 30, 1994, between First Madison Bank, FSB,
and Granite Management and Disposition, Inc. (incorporated by reference to Exhibit 10.1 to the
Registrant's filing on Form 8-K dated October 3, 1994).
*10.8 Settlement Agreement, dated July 17, 1991, by and among First Gibraltar Bank, FSB, Affiliated
Computer Services, Inc. and the Federal Deposit Insurance Corporation, in its corporate capacity,
the Federal Deposit Insurance Corporation, as receiver for Gibraltar Savings Association, and the
Federal Deposit Insurance Corporation, as receiver for First Texas Savings Association
(incorporated by reference to Exhibit 10.2 to the Registrant's filing on Form 8-K dated October
3, 1994).
*10.9 Office Lease dated as of November 15, 1990, between Webb/San Francisco Ventures, Ltd. and First
Nationwide Bank, A Federal Savings Bank. Confidential treatment has been granted for portions of
this document (incorporated by reference to Exhibit 10.6 to Amendment No. 3 to the Registrant's
Registration Statement on Form S-1 (File No. 33-82654)).
*10.10 Exchange Agreement dated September 26, 1994 by and among Gerald J. Ford, the Registrant and
NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.12 to Amendment No. 2 to the
Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
*10.11 Exchange Agreement dated October 20, 1994 between Carl B. Webb and the Registrant.
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE NUMBER
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*10.12 Stockholders Agreement dated October 3, 1994 by and among Gerald J. Ford, the Registrant and
First Nationwide (Parent) Holdings Inc. (incorporated by reference to Exhibit 10.16 to Amendment
No. 2 to the Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
*10.13 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Gerald J. Ford,
dated as of October 1, 1994 (incorporated by reference to Exhibit 10.13 to the Registrant's
filing on Form 10-K for the year ended December 31, 1994).
*10.14 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Carl B. Webb, II,
dated as of February 1, 1995 (incorporated by reference to Exhibit 10.14 to the Registrant's
filing on Form 10-K for the year ended December 31, 1994).
*10.15 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Christie S.
Flanagan, dated as of October 1, 1994 (incorporated by reference to Exhibit 10.15 to the
Registrant's filing on Form 10-K for the year ended December 31, 1994).
*10.16 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and James R. Staff,
dated as of February 1, 1995 (incorporated by reference to Exhibit 10.16 to the Registrant's
filing on Form 10-K for the year ended December 31, 1994).
*10.17 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Lacy Newman,
dated as of February 1, 1995.
*10.18 Mortgage Company Asset Sale Agreement by and among Resolution Trust Corporation as conservator
for Standard Federal Savings Association, America's Mortgage Servicing, Inc., A Mortgage Company,
America's Lending Network, Inc. and StanFed Financial Services, Inc., and First Nationwide
Mortgage Corporation, dated as of December 1, 1994 (incorporated by reference to Exhibit 10.18 to
the Registrant's filing on Form 10-K for the year ended December 31, 1994).
*10.19 Receivables Sale Agreement by and among Resolution Trust Corporation as conservator for Standard
Federal Savings Association, America's Mortgage Servicing, Inc., A Mortgage Company, and
America's Lending Network, Inc., and First Nationwide Mortgage Corporation, dated as of December
1, 1994 (incorporated by reference to Exhibit 10.19 to the Registrant's filing on Form 10-K for
the year ended December 31, 1994).
*10.20 Purchase and Sale Agreement by and between Resolution Trust Corporation in its corporate capacity
and First Nationwide Mortgage Corporation, dated as of December 1, 1994 (incorporated by
reference to Exhibit 10.20 to the Registrant's filing on Form 10-K for the year ended December
31, 1994).
*10.21 Purchase and Sale Agreement by and among Resolution Trust Corporation as receiver of or
conservator for certain associations and First Nationwide Mortgage Corporation, dated as of
December 1, 1994 (incorporated by reference to Exhibit 10.21 to the Registrant's filing on Form
10-K for the year ended December 31, 1994).
*10.22 Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal
Savings Association, et al., and First Nationwide Mortgage Corporation, dated December 2, 1994,
regarding the Mortgage Company Asset Sale Agreement, Receivable Sales Agreement, and two Purchase
and Sales Agreements among such parties, as of December 1, 1994 (incorporated by reference to
Exhibit 10.22 to the Registrant's filing on Form 10-K for the year ended December 31, 1994).
*10.23 Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal
Savings Association, et al., and First Nationwide Mortgage Corporation, dated February 23, 1995,
regarding the Mortgage Company Asset Sale Agreement, Receivable Sales Agreement, and two Purchase
and Sales Agreements among such parties, as of December 1, 1994 (incorporated by reference to
Exhibit 10.23 to the Registrant's filing on Form 10-K for the year ended December 31, 1994).
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE NUMBER
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*10.24 Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal
Savings Association, et al., and First Nationwide Mortgage Corporation, dated February 24, 1995,
regarding the Mortgage Company Asset Sale Agreement among such parties, as of December 1, 1994
(incorporated by reference to Exhibit 10.24 to the Registrant's filing on Form 10-K for the year
ended December 31, 1994).
*10.25 Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal
Savings Association, et al., and First Nationwide Mortgage Corporation, dated February 28, 1995,
regarding the Mortgage Company Asset Sale Agreement among such parties, as of December 1, 1994
(power of attorney matters) (incorporated by reference to Exhibit 10.25 to the Registrant's
filing on Form 10-K for the year ended December 31, 1994).
*10.26 Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal
Savings Association, et al., and First Nationwide Mortgage Corporation, dated February 28, 1995,
regarding the Mortgage Company Asset Sale Agreement among such parties, as of December 1, 1994
(amendments to schedules) (incorporated by reference to Exhibit 10.26 to the Registrant's filing
on Form 10-K for the year ended December 31, 1994).
*10.27 Agreement for Provision of Services between First Nationwide Bank, A Federal Savings Bank, and
Trans Network Insurance Services Inc. (then named "First Gibraltar (Parent) Holdings Inc."),
dated effective December 1, 1994 (incorporated by reference to Exhibit 10.27 to the Registrant's
filing on Form 10-K for the year ended December 31, 1994).
*10.28 Assignment from Trans Network Insurance Services Inc. to First Nationwide Management Corp. of
Agreement for Provision of Services (incorporated by reference to Exhibit 10.37 to the
Registrant's filing on Form 10-K for the year ended December 31, 1995).
*10.29 Asset Purchase Agreement between Trans Network Insurance Services Inc. and FNC Insurance Agency,
Inc. dated effective June 1, 1995 (incorporated by reference to Exhibit 10.24 to Post-Effective
Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
*10.30 Trans Network Marketing and Support Services Agreement between First Nationwide Bank, A Federal
Savings Bank, and Trans Network Insurance Services Inc. dated effective June 1, 1995
(incorporated by reference to Exhibit 10.25 to Post-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (File No. 33-82654)).
*10.31 Amendment No. 2 to Lease between First Nationwide Bank, A Federal Savings Bank, and RNM 135 Main,
L.P. dated April 6, 1995 (incorporated by reference to Exhibit 10.26 to Post-Effective Amendment
No. 1 to the Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
*10.32 Consulting Agreement between First Nationwide Management Corp. and Gerald J. Ford dated as of
October 1, 1994 (incorporated by reference to Exhibit 10.27 to Post-Effective Amendment No. 1 to
the Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
*10.33 First Amendment, dated as of January 1, 1995, by and among First Nationwide Management Corp.,
Diamond A-Ford Corporation, Trans Network Insurance Services, Inc. and Gerald J. Ford,
supplementing the Consulting Agreement between First Nationwide Management Corp. and Gerald J.
Ford dated as of October 1, 1994.
*10.34 Management Incentive Plan for Certain Employees of First Nationwide Bank, A Federal Savings Bank.
*10.35 Reimbursement and Expense Allocation Agreement, dated as of January 1, 1996, by and between First
Nationwide Management Corp. and the Registrant.
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE NUMBER
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*10.36 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Roger L. Gordon,
dated as of January 30, 1996 (incorporated by reference to Exhibit 10.15 to the Registrant's
filing on Form 10-K for the year ended December 31, 1995).
*10.37 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Richard P. Hodge
(incorporated by reference to Exhibit 10.16 to the Registrant's filing on Form 10-K for the year
ended December 31, 1995).
*12.1 Statement regarding the computation of ratio of earnings to fixed charges for the Registrant
(incorporated by reference to Exhibit 12.1 to the Registrant's filing on Form 10-K for the year
ended December 31, 1995).
*21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2 Consent of Coopers & Lybrand LLP, Independent Auditors.
*23.3 Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1).
23.4 Consent of Deloitte & Touche LLP, Independent Auditors.
*24.1 Power of Attorney executed by Ronald O. Perelman.
*24.2 Power of Attorney executed by P. Richard Frieder (who resigned as a director of the Registrant
effective March 27, 1996).
*24.3 Power of Attorney executed by Howard Gittis.
*24.4 Power of Attorney executed by Irwin Engelman.
*24.5 Power of Attorney executed by Laurence Winoker.
*25.1 Statement of Eligibility and Qualification on Form T-1 of The Bank of New York, as trustee under
the Indenture relating to the Notes (bound separately).
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees.
*99.4 Form of Letter to Clients.
</TABLE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
Board of Directors
First Nationwide Holdings Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the Prospectus. Our report refers to
a change in accounting for mortgage servicing rights in 1995, a change in
accounting for certain investments in debt and equity securities in 1994 and
a change in accounting for income taxes in 1993.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG PEAT MARWICK LLP
Dallas, Texas
May 15, 1996
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement of First
Nationwide Holdings Inc. on Form S-1 related to the offer for all outstanding
Senior Subordinated Notes Due 2003 in exchange for Senior Subordinated
Exchange Notes Due 2003 of our report, which includes an explanatory
paragraph referring to a change in method of accounting for income taxes and
postretirement health benefits in 1992, dated May 10, 1994, on our audits of
the financial statements of the Acquired Business. We also consent to the
reference of our firm under the caption "Experts."
/s/ Coopers & Lybrand
---------------------
COOPERS & LYBRAND
San Francisco, California
May 14, 1996
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement
No. 333-00854 of First Nationwide Holdings Inc. on Form S-1 of our report dated
April 15, 1996, (relating to the consolidated financial statements of SFFed
Corp. for the years ended December 31, 1995, 1994 and 1993 and which expresses
an unqualified opinion and includes an explanatory paragraph relating to the
acquisition of SFFed Corp.) appearing in the Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche
---------------------
Deloitte & Touche LLP
May 15, 1996
